Ministerial Statement

The devastating earthquakes in Canterbury have had a significant impact on the Government's fiscal position.

The Financial Statements of the Government for the year ended 30 June 2011 include net costs to the Crown of around $9.1 billion in relation to these tragic events.

In 2010/11, there was modest growth in tax revenue reflecting the economic recovery during the period, while core Crown expenses rose sharply due to large one-off factors (such as the Emissions Trading Scheme and the Weathertight homes financial assistance package), together with the impact of higher debt-financing costs due to rising Crown debt.

The net result of these factors is that the operating deficit before gains and losses weakened markedly to $18.4 billion at 30 June 2011. However, the Government has taken a series of decisions that will significantly reduce the deficit in the current year and set the Crown on a path back to surplus.

The recovery in world markets during the year helped produce gains for Crown investment funds (the New Zealand Superannuation Fund, the Accident Compensation Corporation and the Earthquake Commission). Including these gains, the headline operating deficit was $13.4 billion (compared with $4.5 billion a year earlier).

At 30 June 2011, core Crown net debt stood at $40.1 billion or 20.0% of GDP and the Crown's net worth stood at $80.9 billion, or 40.4% of GDP.

The global financial crisis and the Canterbury earthquakes have demonstrated to New Zealanders and to the Government the importance of the Crown maintaining a strong fiscal position.

Looking forward, the Government is committed to rebuilding the Crown's fiscal position to ensure that New Zealand is well placed to deal with any future unexpected shocks.

 

Hon Bill English
Minister of Finance

30 September 2011

Statement of Responsibility

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

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

 

Gabriel Makhlouf
Secretary to the Treasury

30 September 2011

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 2011 and its operations for the year ended on that date.

 

Hon Bill English
Minister of Finance

30 September 2011

Commentary

Introduction

These financial statements[1] contain the audited results for the financial year ended 30 June 2011. The results are compared against previous years, and against two sets of forecasts:

  • the Budget 2010 forecast as published in the 2010 Budget Economic and Fiscal Update, and
  • the Budget 2011 forecast as published in the 2011 Budget Economic and Fiscal Update (the “forecast”).

This commentary should be read in conjunction with the financial statements on pages 30 to 180.

At a Glance

Table 1 - Financial results
Year ended 30 June   Forecast
30 June 2011
$million Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Budget 10 Budget 11
Core Crown tax revenue 50,973 53,477 56,747 54,681 50,744 51,557 53,912 51,189
Core Crown expenses 49,320 54,004 56,997 64,002 64,013 70,450 70,651 72,794
Operating balance before gains and losses 7,091 5,860 5,637 (3,893) (6,315) (18,396) (8,632) (16,728)
Operating balance 9,542 8,022 2,384 (10,505) (4,509) (13,360) (7,067) (9,437)
Gross debt 33,903 30,647 31,390 43,356 53,591 72,420 66,969 71,578
Net debt 16,163 13,380 10,258 17,119 26,738 40,128 39,965 41,502
Total Crown net worth 83,971 96,827 105,514 99,515 94,988 80,887 89,416 85,519

Notes

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

Summary

The economy continues to recover from recession…

Figure 1 - Nominal and Real GDP growth
Figure 1 - Nominal and Real GDP growth.
Source: The Treasury

Despite the Canterbury earthquakes, the economy experienced higher growth in nominal GDP in 2010/11 owing to a recovery in domestic demand as well as higher prices, including for our exports. This translated into higher growth in business profitability and salary and wage earnings.

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

...and tax revenue has grown modestly.

Core Crown tax revenue increased by $0.8 billion over the year, reflecting growth in private consumption and company tax but tax policy changes have largely offset the impact of this growth. Table 4 on page 8 summarises the movements for the year.

But expenses have risen sharply...

Of the total Crown expenses of $100.0 billion, $70.4 billion was for core Crown expenses (ie, incurred by Ministers, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank).

Total Crown expenses have increased by $18.9 billion from the previous year of which $13.6 billion was earthquake-related.

Within core Crown expenses, costs have risen by $6.4 billion (figure 2) of which non-earthquake costs increased by $4.5 billion. Health, education and welfare spending have all contributed to this latest financial year’s increase along with the Emissions Trading Scheme and the weathertight homes financial assistance package. Table 6 on page 11 summarises the increases in core Crown expenses.

Earthquake expenses pushed up core Crown expenses by $1.9 billion, including financial support packages for the Red Zone and AMI and social assistance payments. Most earthquake expenses were, however, captured in the Crown Entity segment of these accounts, with EQC's insurance expenses pushed up by a net $7.5 billion (comprising a hike in insurance expenses of $11.7 billion, of which $4.2 billion was offset by reinsurance recoveries).

Although significant earthquake-related expenses have been recognised this year, more earthquake expenses are still to come. The section on Canterbury earthquakes on page 12 provides further details of the impact of the earthquakes on the Financial Statements of Government.

...resulting in a large operating deficit…

Figure 3 - Components of the operating deficit
Figure 3 - Components of the operating deficit.
Source: The Treasury

The operating deficit before gains and losses (OBEGAL) increased by $12.1 billion from last year to stand at $18.4 billion in the year ended 30 June 2011 (figure 3).

Recovery in investment markets in the first part of the year however, contributed to the Crown making a net gain in its financial portfolio of $5.0 billion (compared to a $1.8 billion gain in the previous year).

Overall, the operating balance inclusive of gains and losses was in deficit by $13.4 billion.

...leading to increased borrowings…

Figure 4 - Cash proceeds from issue of market domestic bonds
Figure 4  - Cash proceeds from issue of market domestic bonds
Source: The Treasury

Combining the cash impact of the operating results with capital expenditure and advances, the Crown recorded a residual cash deficit for the year of $13.3 billion. This deficit was funded through an increase in borrowings, primarily through the domestic bond programme (figure 4).

...and a reduction in net worth.

Operating deficits have led to a decline in net worth. The Crown's net worth fell $14.1 billion to stand at $80.9 billion at 30 June 2011.

Fiscal Strategy

The financial statements of the Government provide a snapshot of the progress the Government has made in implementing its fiscal strategy as set out in its Fiscal Strategy Report.

Table 2 - Financial results against the long-term fiscal objectives outlined in the 2011 Fiscal Strategy Report

Table 2	- Financial results against the long-term fiscal objectives outlined in the 2011 Fiscal Strategy Report.

 

Revenue

Table 3 - Breakdown of revenue
Year ended 30 June   Forecast
30 June 2011
Actual 2006 Actual 2007 Actual 2008 Actual 2009 Actual 2010 Actual 2011 Budget 10 Budget 11

$ million

               
Core Crown tax revenue 50,973 53,477 56,747 54,681 50,744 51,557 53,912 51,189
Core Crown other revenue 4,762 4,734 5,072 4,801 5,472 5,993 6,348 5,761
Core Crown revenue 55,735 58,211 61,819 59,482 56,216 57,550 60,260 56,950
Crown entities, SOEs and eliminations 15,690 16,378 19,660 20,024 18,509 24,013 21,521 23,219
Total Crown revenue 71,425 74,589 81,479 79,506 74,725 81,563 81,781 80,169

% of GDP

               
Core Crown tax revenue 31.5% 31.1% 31.0% 29.5% 26.8% 25.7% 26.4% 25.6%
Core Crown other revenue 2.9% 2.8% 2.8% 2.6% 2.9% 3.0% 3.1% 2.9%
Core Crown revenue 34.4% 33.8% 33.7% 32.1% 29.7% 28.7% 29.6% 28.5%
Crown entities, SOEs and eliminations 9.7% 9.5% 10.7% 10.8% 9.8% 12.0% 10.6% 11.6%
Total Crown revenue 44.1% 43.4% 44.4% 42.9% 39.5% 40.7% 40.1% 40.1%
Figure 5 - Core Crown tax revenue
Figure 5 - Core Crown tax revenue.
Source: The Treasury

Total revenue increased over the year by $6.8 billion to $81.6 billion. Core Crown tax revenue contributed $0.8 billion (1.6%) to this increase (figure 5) and $4.2 billion was due to insurance claims on reinsurers as a result of the Canterbury Earthquakes. The impact of the earthquakes on the financial statements is discussed more fully in a separate section on page 12.

Core Crown Tax Revenue

Table 4 - Movement in core Crown tax revenue ($ billion)
Year ended 30 June  
2010 core Crown tax revenue 50.7
Tax cuts (2.7)
Growth in income and domestic consumption 1.3
Higher business profits 0.5
Increase in GST rate 1.6
Other movements 0.1
2011 core Crown tax revenue 51.5

Source: The Treasury

Core Crown tax revenue was close to forecast at $51.5 billion. Growth in tax has been diluted by policy changes introduced in Budget 2010. These policy changes had the impact of reducing taxes levied by $2.7 billion. Table 4 summarises the movements from last year. Specifically:

  • Salary and wages have increased during the year although the impact of personal income tax cuts have more than offset any increases in tax coming from source deductions.
  • Business profits (both corporate and individual) have also increased over the year but again the impact of policy changes through tax cuts have seen lower tax takes from corporate and ‘other individuals' compared with a year earlier.
  • On 1 October 2010, the GST rate increased from 12.5% to 15%. In addition there was a small increase in consumption over the year resulting in an increase in GST revenue.
Figure 6 - Core Crown tax revenue against forecast
Figure 6 - Core Crown tax revenue against forecast.
Source: The Treasury

Compared to forecast, core Crown tax revenue was $0.4 billion (0.7%) more than expected. Included in this result were the following items (figure 6):

  • Both source deductions tax and GST revenue were higher than expected (by $0.2 billion and $0.5 billion respectively). The source deductions increase was due to stronger wage growth while GST was due to stronger than forecast consumption.
  • In contrast, corporate tax and other tax revenue were lower than forecast (by $0.2 billion and $0.1 billion respectively) reflecting weaker than expected business profits and lower than expected customs and excise duties.
Figure 7 - Other revenue
Figure 7 - Other revenue.
Source: The Treasury

Other Revenue

Other revenue includes other sovereign revenue (eg, ACC levies), sales of goods and services, interest income and dividend income.

Other revenue increased by $6.1 billion over the year to $30.4 billion (figure 7). Of this increase in revenue, $4.2 billion relates to EQC's insurance claim on reinsurers and $0.8 billion relates to an increase in sales of goods and services primarily in the SOE and Crown Entity sectors. However, increases in SOE revenue were largely offset by increases in SOE operating expenses. Likewise, revenue from EQC's reinsurers was more than offset by the increase in insurance expenses (refer the Canterbury Earthquakes section on page 12).

The remainder includes $0.9 billion of increases in ACC levies, Emissions Trading Scheme revenues and interest and dividend revenue (primarily due to the increase in Kiwibank mortgages) ($0.3 billion for each).

Expenses

Table 5 - Breakdown of expenses

Year ended 30 June

            Forecast
30 June 2011
  Actual 2006 Actual 2007 Actual 2008 Actual 2009 Actual 2010 Actual 2011 Budget 10 Budget 11

$ million

               
Social security and welfare 15,598 16,768 17,877 19,382 21,185 22,005 22,120 22,175
Health 9,547 10,355 11,297 12,368 13,128 13,753 14,043 13,774
Education 9,914 9,269 9,551 11,455 11,724 11,650 11,992 12,039
Core government services 2,507 4,817 3,371 5,293 2,974 5,563 3,979 6,357
Law and order 2,235 2,699 2,894 3,089 3,191 3,382 3,537 3,526
Other core Crown expenses 9,519 10,096 12,007 12,415 11,811 14,097 14,980 14,923
Core Crown expenses 49,320 54,004 56,997 64,002 64,013 70,450 70,651 72,794
Crown entities, SOEs and eliminations 15,015 14,725 18,845 19,397 17,027 29,509 19,762 24,103
Total Crown expenses 64,334 68,729 75,842 83,399 81,040 99,959 90,413 96,897

% of GDP

               
Social security and welfare 9.6% 9.7% 9.8% 10.5% 11.2% 11.0% 10.8% 11.1%
Health 5.9% 6.0% 6.2% 6.7% 6.9% 6.9% 6.9% 6.9%
Education 6.1% 5.4% 5.2% 6.2% 6.2% 5.8% 5.9% 6.0%
Core government services 1.5% 2.8% 1.8% 2.9% 1.6% 2.8% 2.0% 3.2%
Law and order 1.4% 1.6% 1.6% 1.7% 1.7% 1.7% 1.7% 1.8%
Other core Crown expenses 5.9% 5.9% 6.5% 6.7% 6.2% 7.0% 7.3% 7.5%
Core Crown expenses 30.5% 31.4% 31.1% 34.5% 33.8% 35.2% 34.7% 36.4%
Crown entities, SOEs and eliminations 9.3% 8.6% 10.3% 10.5% 9.0% 14.7% 9.7% 12.1%
Total Crown expenses 39.7% 39.9% 41.4% 45.0% 42.8% 49.9% 44.3% 48.5%
Figure 8 - Core Crown expenses
Figure 8 - Core Crown expenses.
Source: The Treasury

Total Crown expenses increased by $18.9 billion from the previous year to stand at $100.0 billion. Of this increase, $13.6 billion was due to expenses arising from the Canterbury earthquakes; EQC insurance expenses were $11.7 billion higher than last year due to the Canterbury earthquakes and core Crown spending increased by $1.9 billion due to earthquake-related expenditure (the balance relates to other SOE and Crown entities). A more detailed analysis of earthquake expenses is provided in the Canterbury Earthquakes section below.

Core Crown expenses excluding earthquake-related expenses also increased by $4.5 billion compared to last year (figure 8). Increases in other operating expenses were also evident across the SOE and CE sectors but these increases were largely offset by increases in operating revenue.

Core Crown Expenses

Table 6 - Movement in core Crown expenses
Year ended 30 June  
2010 core Crown expenses 64.0
Earthquake related expenditure 1.9
Health expenses 0.6
Education expenses (0.1)
Benefit expenses (excl. earthquake support) 0.6
Weathertight homes 0.6
Treaty settlements 0.4
ETS provision increase 0.9
Interest expenses 0.8
Other movements 0.7
2011 core Crown expenses 70.4
Source: The Treasury

Core Crown expenses increased by $6.4 billion compared to the previous year as illustrated in Table 6. The main drivers of the increase included:

  • Canterbury earthquake expenditure of $1.9 billion.
  • Health expenses increased by $0.6 billion primarily as a result of new spending initiatives.
  • Although education expenses decreased by $0.1 billion overall, this is due to a reversal of impairments on student loans of $0.4 billion. Excluding this impairment, education expenditure has increased by $0.3 billion primarily as a result of new spending initiatives.
  • Benefit expenses (excluding earthquake-related benefits) increased by $0.6 billion. This increase was primarily attributable to increases in New Zealand Superannuation which rose by $0.5 billion. $0.3 billion of this increase was due to an increase in the number of recipients while indexation of benefits led to an increase of $0.2 billion. Policy changes also increased expenses marginally.
  • The establishment of the Crown's weathertight homes financial assistance package has contributed $0.6 billion in expenses this year.
  • Treaty settlements have increased in the current year with $0.5 billion of settlements compared to $0.1 billion in 2010.
  • The Emissions Trading Scheme (ETS) saw more NZ Units issued compared with the previous year with more sectors entering into the ETS. In 2009/10 only the forestry sector had entered the Scheme.
  • Interest expenses have increased compared to last year due to the higher levels of debt held (gross debt has increased from $53.6 billion to $72.4 billion).
Figure 9 - Core Crown expenses by sector
Figure 9 - Core Crown expenses by sector.
Source: The Treasury

Compared to expectations in Budget 2011, core Crown expenses were $2.3 billion lower than forecast primarily as a result of:

  • Lower-than-forecast earthquake expenses primarily due to delays in assessing and measuring damage. This resulted in $1.2 billion lower expenses than forecast. These expenses are now expected to occur in the next financial year.
  • Fewer NZ units were issued under the ETS than forecast resulting in $0.4 billion lower expenses.
  • The remainder of this underspend in other operating expenses was across a number of departments and expense types.

Canterbury Earthquakes

Operating Balance Impact

The operating deficit before gains and losses included a net cost of $9.1 billion in relation to the Canterbury earthquakes (table 7).

Table 7 - Impact on OBEGAL
Year ended 30 June
$ million
Actual
2011
Budget
2011
Difference
Local infrastructure 160 789 629
State-owned assets 46 25 (21)
Welfare support and emergency responses 363 457 94
AMI support package 335 427 92
Red zone properties1 653 653 -
Other costs1 36 36 -
Yet to be allocated - 422 422
Total core Crown 1,593 2,809 1,216
EQC 7,471 3,050 (4,421)
ACC 7 181 174
Other SOEs and Ces 16 40 24
Total Crown 9,087 6,080 (3,007)

1. Classified as "unallocated" for Budget 2011.

Source: The Treasury

The impact on the OBEGAL consists of $13.6 billion of expenses offset by income (mostly insurance proceeds) of $4.5 billion.

These results do not represent the likely final cost to the Crown arising from the earthquakes, as a number of decisions affecting the cost have still to be made (eg, decisions regarding properties in the Orange zone) or, in the case of local infrastructure costs, have yet to be measured. The total cost is expected to emerge over the next few years as future expenses, such as the cost of the Orange zone, become known.

The major components of this result were:

  • EQC insurance costs (net of reinsurance) ($7.5 billion)
  • the purchase of residential properties in the Red Zone ($0.7 billion), and
  • the AMI support package ($0.3 billion).

On 23 June 2011, the Government announced four zones of land damage in Christchurch and the Waimakariri district (Red, Orange, Green, and White) and its intention to purchase residential property in the Red Zone. The estimated cost of this offer (net of insurance proceeds) was $653 million. Offers made after 30 June 2011 to Orange or White Zone residents are not included in this estimate. Therefore any costs associated with these zones will be recorded in subsequent years.

The Government has agreed to provide back-up support to AMI Insurance in order to give policy holders certainty and to ensure an orderly rebuild of Christchurch. The total amount of the support arrangement was $500 million, of which $335 million represents the portion estimated to be non-recoverable in the event that the support is called on.

Note 30 in these financial statements provides a detailed explanation of the fiscal impact of the earthquakes.

Impact on the National Disaster Fund

The most significant expense recognised in the current financial year relates to the insurance of residential properties by the Earthquake Commission (EQC).

EQC has recorded total insurance expenses of $11.7 billion in the current financial year. Some of these expenses ($4.2 billion) will be met by reinsurers. The majority of the remaining costs are likely to be met by the National Disaster Fund which held around $6 billion prior to the September earthquake. Support will be provided by the Government in the event a shortfall arises in the Fund.

EQC's costs were significantly higher than the $3.1 billion (net of reinsurance) forecast in the May 2011 Budget. This increase reflects an increase in damage estimates for both the February and June earthquakes as building and land damage were estimated to be higher than originally thought.

Charges against the Canterbury Earthquake Recovery Fund

In the 2011 Budget the Government established the Canterbury Earthquake Recovery Fund (CERF) to provide for central government's cost of the earthquakes.

Table 8 - Canterbury Earthquake Recovery Fund
Year ended 30 June
$ million
Actual
2011
Budget
2011
Difference

Canterbury Earthquake Recovery Fund

     
Absorbed by reprioritisation 156 84 (72)
Budget 2010 contingency 64 198 134
Budget 2011 1,373 2,527 1,154
Total Canterbury Earthquake Recovery Fund 1,593 2,809 1,216

Source: The Treasury

A total of $5.5 billion costs were estimated over a six year period; $2.8 billion of this cost was expected in the current year. Actual costs recorded against the fund this year were $1.6 billion (refer table 8) and includes the estimated cost of purchasing residential property in the Red Zone and the non-recoverable portion of the AMI support package.

While costs recorded against CERF in the current financial year were $1.2 billion less than anticipated, this was primarily caused by delays in assessing and measuring damage. It is therefore likely that this variance will reverse in the next financial year as these assessments are made.

Debt Impact

While the operating deficit increased markedly as a result of the earthquakes, the impact on cash (and net core Crown debt) was much smaller with $1.7 billion paid out during the year. The majority of the cash related to claims payments by EQC ($1.2 billion) out of the National Disaster Fund rather than increasing net core Crown debt.

While a number of expenses are recorded which represent obligations of the Government at 30 June 2011, the cash payments associated with those obligations are made over a longer period of time. Therefore, the full impact on debt is expected to be recorded over a number of years as claims are settled or the rebuild takes place.

Future Costs

The cost of the Government's contribution to repairing essential local infrastructure (fresh water, storm water, waste water, and river management systems) requires judgements on the extent and cost of damage in the Canterbury region, on which information remains limited, and judgements on the approach to rebuilding Christchurch, on which decisions have yet to be made. As a result, costs associated with these repairs have not been included in these financial statements. Instead, a contingent liability has been included in the notes to the financial statements (note 32) describing the types and potential range of costs.

In addition, there are still a number of significant decisions to be made regarding the nature of the reconstruction and rebuild. These decisions will likely have fiscal costs associated with them and they include the need to make decisions on the future of the recently announced orange and white zones.

There will also be expenses which will be incurred in the future, such as demolition costs, as the rebuild of Canterbury continues. These costs will be recognised at the time they are incurred.

It is likely that costs will continue to be recognised over the next few years as these decisions are made and the costs are finalised.

Judgements and Estimations

All financial statements include an element of judgement and estimation. The estimation of claims and provisions arising from the Canterbury earthquakes are key areas of judgement in these financial statements.

Cost estimates have been based on the information available at the time of preparing these financial statements. The largest and most complex valuations have been carried out by independent professional actuaries and represent a best estimate of the costs to date. However the final costs of the Canterbury earthquakes will not be certain for some time and these estimates may differ from those final costs.

Operating Balance

Table 9 - Total Crown operating balance
Year ended 30 June   Forecast
30 June 2011
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Budget 10 Budget 11

$ million

               
Total Crown Operating balance before gains and losses 7,091 5,860 5,637 (3,893) (6,315) (18,396) (8,632) (16,728)
Total Crown gains/(losses) 2,451 2,162 (3,253) (6,612) 1,806 5,036 1,565 7,291
Total Crown Operating balance 9,542 8,022 2,384 (10,505) (4,509) (13,360) (7,067) (9,437)

% of GDP

               
Total Crown Operating balance before gains and losses 4.4% 3.4% 3.1% (2.1)% (3.3)% (9.2)% (4.2)% (8.4)%
Total Crown gains/(losses) 1.5% 1.3% (1.8)% (3.6)% 1.0% 2.5% 0.8% 3.6%
Total Crown Operating balance 5.9% 4.7% 1.3% (5.7)% (2.4)% (6.7)% (3.5)% (4.7)%

This year's operating deficit of $13.4 billion compares with a deficit of $4.5 billion in the previous financial year (figure 10). While an improvement in financial markets in the first part of the year resulted in the Crown recording large net gains for the full year, the increase in earthquake-related expenditure more than offset those gains so that the Crown's deficit has grown. Excluding the impact of the earthquakes ($9.1 billion), the operating balance deficit would have been similar to last year.

Figure 10 - Operating balance
Figure 10 - Operating balance.
Source: The Treasury

Operating Balance Before Gains and Losses

The operating deficit before gains and losses (OBEGAL) has increased by $12.1 billion to $18.4 billion, primarily as a result of the Canterbury earthquakes.

The OBEGAL deficit is $1.7 billion larger than forecast in Budget 2011. This increased deficit reflects higher than expected total Crown expenses of $3.1 billion offset by $1.4 billion higher revenue. Total Crown expenses exceeded forecast by $3.1 billion primarily due to increases in EQC's insurance costs arising from the Canterbury earthquakes. Small increases in tax revenue and other revenues have contributed to the $1.4 billion higher than forecast revenue. Refer page 8 for further details of revenue movements.

While total Crown expenses have exceeded forecast, core Crown expenses are lower than forecast by $2.3 billion. Refer page 10 for details of core Crown expenses.

Gains and Losses

The Crown recorded net gains of $5.0 billion this year (compared to net gains of $1.8 billion last year).

Table 10 - Gains and losses
Year ended 30 June   Forecast
30 June 2011
$ million Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Budget 10 Budget 11
ACC actuarial gain/(loss) (706) (481) (1,709) (4,491) 410 996 - 1,251
GSF actuarial gain/(loss) 206 1,133 (1,098) (695) (1,231) (574) - 287
Kyoto net position (303) 20 (226) 768 (15) 47 - -
Investment portfolios:                
NZS Fund 1,130 1,313 (995) (3,495) 1,750 3,518 978 3,576
ACC 681 419 (543) (181) 745 961 53 945
Earthquake Commission 504 (84) (166) (349) 37 109 152 136
Other gains/(losses) 939 (158) 1,484 1,831 110 (21) 382 1,096
  2,451 2,162 (3,253) (6,612) 1,806 5,036 1,565 7,291

The total Crown gain of $5.0 billion was $2.3 billion lower than forecast. Subsequent to the finalisation of Budget 2011 forecasts fluctuations in investment markets have seen a decline in investment returns and some previous gains have reversed.

The ACC actuarial gain of $1.0 billion compares with an actuarial gain of $0.4 billion in the previous year. This improvement from the prior year reflects a reduction in the number of claims and the cost of those claims as well as movements in the discount rate.

Each year the Government Superannuation Fund (GSF) estimates the present value of pension commitments that exist in respect of its defined benefit beneficiaries (former public servants). The GSF scheme recorded an actuarial loss of $0.6 billion in 2011 (compared to a loss of $1.2 billion last year and a forecast gain of $0.3 billion). This loss represents an increase in the liability predominantly as a result of changes in actuarial assumptions (meaning that future benefit payments are estimated to be higher than previously assessed).

The NZS Fund, established to part-fund future New Zealand superannuation costs, recorded a gain of $3.5 billion this year contributing to an operating balance of $3.0 billion for the year (refer table 11 below). The investment return for the year was 25.05% (compared to 15.45% last year). This strong return has resulted in an operating balance that was on track with forecast. Since inception the Fund has returned 7.83% (annualised) or 2.23% more than the rolling yield on 90 day Treasury bills.

Table 11 - NZS Fund results
Year ended 30 June Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
30 June 2011
$ million Budget 10 Budget 11
Opening net worth 6,555 9,855 12,973 14,212 13,688 15,656 16,066 15,656
Revenue 359 436 385 383 433 518 520 495
Current tax expense (468) (707) (237) (4) 27 (872) (310) (795)
Inter-entity expenses - 171 63 400 (421) (58) (46) (32)
Other expenses (52) (119) (97) (77) (81) (111) (89) (235)
Gains/(losses) 1,130 1,313 (995) (3,495) 1,750 3,518 978 3,576
Operating balance 969 1,094 (881) (2,793) 1,708 2,995 1,053 3,009
Gross contribution from the Crown 2,337 2,048 2,104 2,243 250 - - -
Other movements in reserves (6) (24) 16 26 10 1 5 3
Closing net worth 9,855 12,973 14,212 13,688 15,656 18,652 17,124 18,668

Debt

Table 12 - Net debt[2] and Gross debt[3]
Year ended 30 June Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
30 June 2011
Budget 10 Budget 11
Net debt ($m) 16,163 13,380 10,258 17,119 26,738 40,128 39,965 41,502
Net debt (% GDP) 10.0% 7.8% 5.6% 9.2% 14.1% 20.0% 19.6% 20.8%
Gross debt ($m) 33,903 30,647 31,390 43,356 53,591 72,420 66,969 71,578
Gross debt (% GDP) 20.9% 17.8% 17.1% 23.4% 28.3% 36.2% 32.8% 35.8%
Figure 11 - Net debt
Figure 11 - Net debt.
Source: The Treasury

Net Debt

Net debt increases as a result of cash deficits and declines as a result of cash surpluses. It also fluctuates in line with valuation movements in the underlying financial assets and liabilities of the Crown and movements in the amounts of currency issued to New Zealand banks.

The $13.4 billion increase in net debt over the year (figure 11) was primarily due to additional borrowings and a run-down of assets to meet the residual cash deficit of $13.3 billion recorded this year (refer table 13).

Table 13 - Movement in net debt
Year ended 30 June Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
30 June 2011
$ million Budget 10 Budget 11
Opening net debt 19,879 16,163 13,380 10,258 17,119 26,738 26,642 26,738
Net core Crown cash flow from operations (8,859) (8,586) (7,292) 1,967 4,991 9,285 8,339 10,551
Contributions to NZS Fund 2,337 2,048 2,104 2,243 250 - - -
Purchase of physical assets 1,826 1,755 1,433 1,625 1,778 1,524 2,240 1,786
Advances and capital injections 1,711 1,990 1,698 2,804 1,981 2,534 2,748 2,614
Core Crown residual cash (surplus)/deficit (2,985) (2,793) (2,057) 8,639 9,000 13,343 13,327 14,951
Movements in circulating currency (165) (81) (86) (475) (15) (234) (181) (34)
Other valuation changes in financial assets and financial liabilities (566) 91 (979) (1,303) 634 281 177 (153)
Closing net debt 16,163 13,380 10,258 17,119 26,738 40,128 39,965 41,502

The residual cash deficit was $1.6 billion lower than forecast and $4.3 billion larger than last year.

Table 14 summarises the movement in residual cash over the year. Specifically:

  • Core Crown tax receipts were $0.8 billion higher than last year consistent with the increase in core Crown tax revenue.
  • Benefit payments have increased by $0.6 billion in line with the increase in benefit expenses.
  • While core Crown expenses have increased by $6.4 billion, other operating cash payments have only increased by $4.5 billion. This is due to a number of these increases not having an immediate cash impact (eg, earthquake related provisions, the weathertight homes financial assistance package and the increase in the ETS provision).
  • Offsetting the increase in the residual cash deficit was the reduction in contributions to the NZS Fund.
Table 14 - Movements in residual cash ($billion)
Year ended 30 June  
2010 core Crown residual cash (9.0)
Tax receipts 0.8
Benefit payments (0.6)
Other operating cash flows (4.5)
Reduction in NZS Fund contributions 0.3
Other movements (0.3)
2011 core Crown residual cash (13.3)

Source: The Treasury

Figure 12 - Reconciliation of the operating deficit and core Crown residual cash for the year ended 30 June 2011 ($ billion)
Figure 12 - Reconciliation of the operating deficit and core Crown residual cash for the year ended 30 June 2011 ($ billion).

Gross Debt

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

Gross debt at 30 June 2011 was $18.8 billion higher than a year earlier (figure 13). The majority of this increase came from the issue of $19.5 billion of domestic market bonds (New Zealand Government bonds). No repayments of market domestic bonds were made during the year. When combined with the proceeds from non-market domestic bonds, the net issuance of domestic bonds increased gross debt by $18.9 billion (table 15).

The New Zealand Debt Management Office (NZDMO) increased the 2010/11 domestic bond programme by $1 billion to $13.5 billion in December 2010. The 2011 Budget approved a further $6 billion increase, allowing the issue of bonds up to $20 billion. These increases enabled the NZDMO to continue issuance over the fiscal year in line with market demand and means borrowing requirements in future years will be less than they would have needed to be in the absence of this additional pre-emptive borrowing. Net debt did not increase by the same amount as gross debt because surplus proceeds from these bond issuances were invested in financial assets.

Table 15 - Cash proceeds from net bond issuance
Year ended 30 June Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
30 June 2011
$ million Budget 10 Budget 11
Domestic bonds (market) 2,375 2,294 1,757 5,775 12,424 19,468 12,776 20,760
Repayment of domestic bonds (market) (2,574) (2,777) - (2,750) (4,197) - - -
Net increase/(decrease) in market domestic bonds (199) (483) 1,757 3,025 8,227 19,468 12,776 20,760
Domestic bonds (non-market) 740 570 130 541 799 270 224 372
Repayment of domestic bonds (non-market) (375) (421) - (515) (656) (803) - (1,153)
Net increase/(decrease) in non-market domestic bonds 365 149 130 26 143 (533) 224 (781)
Net total bond issuance/(repayment) 166 (334) 1,887 3,051 8,370 18,935 13,000 19,979

Notes

  • [2]Net debt is defined as core Crown net debt excluding the NZS Fund and advances.
  • [3]Gross debt is defined as gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.

Net Worth

Table 16 - Movement in net worth
Year ended 30 June Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
30 June 2011
$ million Budget 10 Budget 11
Opening net worth 54,240 83,971 96,827 105,514 99,515 94,988 96,479 94,988
Operating balance 9,542 8,022 2,384 (10,505) (4,509) (13,360) (7,067) (9,437)
Property, plant and equipment revaluations 20,199 5,232 6,214 4,235 196 (443) - 69
Other movements in reserves (10) (398) 89 271 (214) (298) 4 (101)
Closing net worth 83,971 96,827 105,514 99,515 94,988 80,887 89,416 85,519
Figure 14 - Net worth
Figure 14 - Net worth.
Source: The Treasury

While assets increased by $21.9 billion, a $36.0 billion increase in liabilities and the continuation of operating deficits resulted in a decrease in the Crown's net worth for the third consecutive year (figure 14).

Assets grew by just under 10% (compared to 3% in the previous year). Financial assets increased by $19.4 billion while the property, plant and equipment held by the Crown increased by $1.5 billion. Growth in assets was mainly due to the increase in marketable securities from the increase in bond issues during the year.

Growth in liabilities at 28% was mainly due to an increase in gross debt as discussed in the previous section. Earthquake obligations have also contributed to this increase.

The composition of the balance sheet has changed from last year with property, plant and equipment and borrowings now making up 47% of assets and 55% of liabilities respectively (51% and 54% last year).

Table 17 - Composition of the statement of financial position
Year ended 30 June Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
30 June 2011
$ million Budget 10 Budget 11
Property, plant and equipment 89,141 95,598 103,329 110,135 113,330 114,854 117,742 116,933
Financial assets 66,396 73,718 85,063 93,359 95,971 115,362 104,566 109,680
Other assets 9,503 11,031 12,443 13,657 14,054 14,999 14,609 14,799
Total assets 165,040 180,347 200,835 217,151 223,355 245,215 236,917 241,412
Borrowings 40,027 41,898 46,110 61,953 69,733 90,245 89,416 91,003
Other liabilities 41,042 41,622 49,211 55,683 58,634 74,083 58,085 64,890
Total liabilities 81,069 83,520 95,321 117,636 128,367 164,328 147,501 155,893
Net worth 83,971 96,827 105,514 99,515 94,988 80,887 89,416 85,519

Assets

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

Total Crown assets increased by $21.9 billion this year to reach $245.2 billion at 30 June 2011 (figure 15).

Property, plant and equipment increased by $1.5 billion (1.3%) since 2010. Asset purchases of $6.6 billion were offset by depreciation of $3.7 billion and disposals of $0.4 billion. The remaining movements related to asset revaluations and foreign exchange movements.

Significant asset purchases by sector were:

  • Transport and communications - including state highways and KiwiRail ($2.8 billion)
  • Economic and industrial - including the energy SOE's ($2.0 billion)
  • Education - including school property ($0.6 billion)
  • Health - including hospitals ($0.6 billion)
  • Law and order - including correctional facilities ($0.4 billion).

Asset revaluations across asset classes resulted in downwards revaluations with the exception of the Crown's electricity generation assets. Of these asset classes, State highways and buildings were the largest of the downwards revaluations.

Financial assets (eg, advances) increased by $19.4 billion over the year. The largest contributor to the increase related to ‘other receivables' which increased by $6.9 billion from June 2010 due to insurance claims receivable from reinsurers of $4.2 billion and $0.7 billion estimate of recoveries from receiverships under the deposit guarantee scheme. Cash and marketable securities and derivatives in gain increased by $7.4 billion due to increased borrowings over the year. The value of Kiwibank's mortgage book rose by $1.0 billion while increases in the value of share investments also contributed $2.0 billion to the increase in financial assets.

Other assets (including intangible assets, equity accounted investments and inventory) increased by $0.9 billion. The largest increase was in relation to the Crown's investment in Tertiary Education Institutions which increased $0.2 billion reflecting the increase in the net worth of these entities.

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

Liabilities

Total Crown liabilities increased by $36.0 billion (28.0%) compared to June 2010 (figure 16). The largest driver of the increase related to borrowings (an increase of $20.5 billion or 29.4%).

Borrowings are a combination of gross debt (discussed earlier), the financial liabilities of Crown entities and SOE's and liabilities associated with the Reserve Bank's settlement cash and bank bills.

Table 18 summarises the increase in borrowings over the year. While gross debt[4] increased by $18.8 billion, a portion of that increase related to debt held by other government reporting entities (which are excluded from total Crown borrowings). In addition, Reserve Bank settlement cash and Reserve Bank bills decreased by $0.4 billion over the year and Kiwibank deposits increased by $1.0 billion (mirroring the increase in their loan book).

Table 18 - Increase in borrowings
Year ended 30 June  
2010 Borrowings 69.7
Increase in gross debt 18.8
Increase in gross debt held by Crown entities and SOE's 2.8
Reduction in settlement cash and Reserve bank bills (0.4)
Increase in Kiwibank deposits 1.0
Other movements (1.7)
2011 Borrowings 90.2

Source: The Treasury

The ACC claims liability remained static in comparison to the previous year.

Other liabilities (eg, accounts payable) increased by $15.5 billion. The main increase was in relation to EQC's insurance liability and the AMI financial support package increasing insurance liabilities from $0.1 billion to $12.3 billion. In addition earthquake-related provisions increased other liabilities by $1.2 billion. Other increases in liabilities were offset by a $0.7 billion reduction in the deposit guarantee scheme payment provision arising from payments to guaranteed depositors during the year.

Notes

  • [4]Gross debt is defined as gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.

Historical Financial Information

Historical Financial Information
Year ended 30 June
$ million
2002
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual

Statement of financial performance

                   
Core Crown tax revenue 36,809 40,518 43,358 47,468 50,973 53,477 56,747 54,681 50,744 51,557
Core Crown other revenue 3,136 2,922 2,861 3,577 4,762 4,734 5,072 4,801 5,472 5,993
Core Crown revenue 39,945 43,440 46,219 51,045 55,735 58,211 61,819 59,482 56,216 57,550
Crown entities, SOE revenue and eliminations 10,003 13,170 13,051 14,322 15,690 16,378 19,660 20,024 18,509 24,013
Total Crown revenue 49,948 56,611 59,271 65,367 71,425 74,589 81,479 79,506 74,725 81,563
Social security and welfare 13,485 13,907 14,252 14,682 15,598 16,768 17,877 19,382 21,185 22,005
Health 7,032 7,501 8,111 8,813 9,547 10,355 11,297 12,368 13,128 13,753
Education 6,473 7,016 7,585 7,930 9,914 9,269 9,551 11,455 11,724 11,650
Core government services 1,890 2,130 2,091 2,567 2,507 4,817 3,371 5,293 2,974 5,563
Other core Crown expenses 8,633 9,343 9,843 10,903 11,754 12,795 14,901 15,504 15,002 17,479
Core Crown expenses 37,513 39,897 41,882 44,895 49,320 54,004 56,997 64,002 64,013 70,450
Crown entities, SOE expenses and eliminations 9,964 12,347 11,816 13,397 15,015 14,725 18,845 19,397 17,027 29,509
Total Crown expenses 47,476 52,245 53,698 58,292 64,334 68,729 75,842 83,399 81,040 99,959
OBEGAL 2,471 4,366 5,573 7,075 7,091 5,860 5,637 (3,893) (6,315) (18,396)
Gains/(losses) (185) (2,745) 1,736 (1,144) 2,451 2,162 (3,253) (6,612) 1,806 5,036
Operating balance 2,286 1,621 7,309 5,931 9,542 8,022 2,384 (10,505) (4,509) (13,360)

Statement of financial position

                   
Property, plant and equipment 50,536 52,667 57,940 67,494 89,141 95,598 103,329 110,135 113,330 114,854
Financial assets 22,497 27,799 32,654 42,005 66,396 73,718 85,063 93,359 95,971 115,362
Other assets 14,846 18,461 18,756 19,714 9,503 11,031 12,443 13,657 14,054 14,999
Total assets 87,879 98,927 109,351 129,212 165,040 180,347 200,835 217,151 223,355 245,215
Borrowings 38,492 39,327 37,720 37,728 40,027 41,898 46,110 61,953 69,733 90,245
Other liabilities 26,562 31,588 32,036 37,243 41,042 41,622 49,211 55,683 58,634 74,083
Total liabilities 65,055 70,915 69,756 74,972 81,069 83,520 95,321 117,636 128,367 164,328
Net worth 22,825 28,012 39,595 54,240 83,971 96,827 105,514 99,515 94,988 80,887

Debt Indicators

                   
Net debt 25,388 24,531 23,858 19,879 16,163 13,380 10,258 17,119 26,738 40,128
Gross debt 36,650 36,617 36,017 35,478 33,903 30,647 31,390 43,356 53,591 72,420
Historical Financial Information (continued)
Year ended 30 June
as % of GDP
2002
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
Nominal GDP (revised) 127,511 134,659 145,200 154,376 161,890 172,060 183,325 185,449 189,359 200,291

Statement of financial performance

                   
Core Crown tax revenue 28.9% 30.1% 29.9% 30.7% 31.5% 31.1% 31.0% 29.5% 26.8% 25.7%
Core Crown other revenue 2.5% 2.2% 2.0% 2.3% 2.9% 2.8% 2.8% 2.6% 2.9% 3.0%
Core Crown revenue 31.3% 32.3% 31.8% 33.1% 34.4% 33.8% 33.7% 32.1% 29.7% 28.7%
Crown entities, SOE and elimination revenue 7.8% 9.8% 9.0% 9.3% 9.7% 9.5% 10.7% 10.8% 9.8% 12.0%
Total Crown revenue 39.2% 42.0% 40.8% 42.3% 44.1% 43.4% 44.4% 42.9% 39.5% 40.7%
Social security and welfare 10.6% 10.3% 9.8% 9.5% 9.6% 9.7% 9.8% 10.5% 11.2% 11.0%
Health 5.5% 5.6% 5.6% 5.7% 5.9% 6.0% 6.2% 6.7% 6.9% 6.9%
Education 5.1% 5.2% 5.2% 5.1% 6.1% 5.4% 5.2% 6.2% 6.2% 5.8%
Core government services 1.5% 1.6% 1.4% 1.7% 1.5% 2.8% 1.8% 2.9% 1.6% 2.8%
Other core Crown expenses 6.8% 6.9% 6.8% 7.1% 7.3% 7.4% 8.1% 8.4% 7.9% 8.7%
Core Crown expenses 29.4% 29.6% 28.8% 29.1% 30.5% 31.4% 31.1% 34.5% 33.8% 35.2%
Crown entities, SOE and elimination expenses 7.8% 9.2% 8.1% 8.7% 9.3% 8.6% 10.3% 10.5% 9.0% 14.7%
Total Crown expenses 37.2% 38.8% 37.0% 37.8% 39.7% 39.9% 41.4% 45.0% 42.8% 49.9%
OBEGAL 1.9% 3.2% 3.8% 4.6% 4.4% 3.4% 3.1% -2.1% -3.3% -9.2%
Gains/(losses) -0.1% -2.0% 1.2% -0.7% 1.5% 1.3% -1.8% -3.6% 1.0% 2.5%
Operating balance 1.8% 1.2% 5.0% 3.8% 5.9% 4.7% 1.3% -5.7% -2.4% -6.7%

Statement of financial position

                   
Property, plant and equipment 39.6% 39.1% 39.9% 43.7% 55.1% 55.6% 56.4% 59.4% 59.8% 57.3%
Financial assets 17.6% 20.6% 22.5% 27.2% 41.0% 42.8% 46.4% 50.3% 50.7% 57.6%
Other assets 11.6% 13.7% 12.9% 12.8% 5.9% 6.4% 6.8% 7.4% 7.4% 7.5%
Total assets 68.9% 73.5% 75.3% 83.7% 101.9% 104.8% 109.6% 117.1% 118.0% 122.4%
Borrowings 30.2% 29.2% 26.0% 24.4% 24.7% 24.4% 25.2% 33.4% 36.8% 45.1%
Other liabilities 20.8% 23.5% 22.1% 24.1% 25.4% 24.2% 26.8% 30.0% 31.0% 37.0%
Total liabilities 51.0% 52.7% 48.0% 48.6% 50.1% 48.5% 52.0% 63.4% 67.8% 82.0%
Net worth 17.9% 20.8% 27.3% 35.1% 51.9% 56.3% 57.6% 53.7% 50.2% 40.4%

Debt Indicators

                   
Net debt 19.9% 18.2% 16.4% 12.9% 10.0% 7.8% 5.6% 9.2% 14.1% 20.0%
Gross debt 28.7% 27.2% 24.8% 23.0% 20.9% 17.8% 17.1% 23.4% 28.3% 36.2%

Report of the Auditor General

To the Readers of the Financial Statements of the Government of New Zealand for the year ended 30 June 2011

I have audited the financial statements of the Government of New Zealand for the year ended 30 June 2011 using my staff, resources and appointed auditors and their staff.

The financial statements of the Government of New Zealand on pages 30 to 180 comprise:

  • the annual financial statements that include the statement of financial position as at 30 June 2011, the statement of financial performance, analysis of expenses by functional classification, statement of comprehensive income, statement of changes in net worth and statement of cash flows for the year ended on that date, a statement of segments, and the notes to the financial statements that include accounting policies, a statement of borrowings in note 24, and other explanatory information; and
  • the statement of unappropriated expenditure, statement of expenses or capital expenditure incurred in emergencies and statement of trust money.

Opinion

In my opinion, the financial statements of the Government of New Zealand on pages 30 to 180:

  • comply with generally accepted accounting practice in New Zealand; and
  • fairly reflect the Government of New Zealand's:
    • financial position as at 30 June 2011;
    • financial performance and cash flows for the year ended on that date; and
    • the borrowings as at 30 June 2011, and unappropriated expenditure, expenses or capital expenditure incurred in emergencies, and trust money managed by the Government, for the year ended on that date.

Emphasis of matter - uncertainties due to the Canterbury earthquakes

Without modifying my opinion, I draw your attention to note 30 to the financial statements about the effects of the Canterbury earthquakes. The most significant effects of the earthquakes relate to the Earthquake Commission (EQC), the AMI support package, the Canterbury residential red zone support package, and the government's share of local authority costs in response to the earthquakes and its share of costs for restoring local authority infrastructure damaged by the earthquakes.

The note describes:

  • the inherent uncertainties involved in estimating EQC's and AMI's earthquake related outstanding claims liabilities and reinsurance receivables, using actuarial assumptions (see notes 30a and 30c);
  • the inherent uncertainties involved in estimating the provision resulting from the government's offer to purchase properties in the Canterbury residential red zone, using actuarial assumptions (see note 30b); and
  • the high level of uncertainty associated with the government's share of costs for restoring local authority infrastructure damaged by the earthquakes (see note 30d). The uncertainty is such that it is not possible to reliably estimate the costs; therefore a provision has not been recognised for them. Instead, there is disclosure of a contingent liability for these unquantifiable costs.

I consider the disclosures about the uncertainties related to the Canterbury earthquakes to be adequate.

My audit was completed on 30 September 2011. This is the date at which my opinion is expressed.

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

Basis of opinion

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

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

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

An audit also involves evaluating:

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

My staff and appointed auditors and their staff did not examine every transaction. Therefore, I do not guarantee complete accuracy of the financial statements. I have obtained all the information and explanations I have required and I believe I have obtained sufficient and appropriate audit evidence to provide a basis for my audit opinion.

Responsibilities of the Treasury and the Minister of Finance

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

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

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

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

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

Responsibilities of the Auditor

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

Independence

As an Officer of Parliament, I am constitutionally and operationally independent of the Government. Prior to commencing my role as Auditor-General on 5 October 2009, I was Deputy Commissioner of the New Zealand Police. Thus the Deputy Auditor-General deals with all matters relating to the New Zealand Police or the Independent Police Conduct Authority. Other than this matter, and in exercising functions and powers under the Public Audit Act 2001 as the auditor of public entities, I have no relationship with or interests in the Government.

 

Lyn Provost
Controller and Auditor-General
Wellington, New Zealand

Audited Financial Statements

Statement of Financial Performance

for the year ended 30 June 2011

Statement of Financial Performance for the year ended 30 June 2011
Forecast
30 June 2011
  Note Actual
Budget 10
$m
Budget 11
$m
30 June 2011
$m
30 June 2010
$m
   

Revenue

     
53,457 50,640 Taxation revenue 2 51,128 50,347
5,759 5,444 Other sovereign revenue 2 5,281 4,682
59,216 56,084 Total revenue levied through the Crown's sovereign power   56,409 55,029
15,399 15,128 Sales of goods and services 3 15,084 14,331
4,063 2,618 Interest revenue and dividends 4 2,570 2,315
3,103 6,339 Other revenue 5 7,500 3,050
22,565 24,085 Total revenue earned through operations   25,154 19,696
81,781 80,169 Total revenue (excluding gains)   81,563 74,725
   

Expenses

     
22,628 22,340 Transfer payments and subsidies 6 22,172 21,213
19,109 18,859 Personnel expenses 7 19,088 18,477
4,428 4,786 Depreciation and amortisation 8 4,682 4,229
35,927 38,137 Other operating expenses 9 35,829 31,338
4,612 3,506 Interest expenses 10 3,596 2,777
3,725 9,519 Insurance expenses 11 14,592 3,006
394 - Forecast new operating spending   - -
(410) (250) Top-down expense adjustment   - -
90,413 96,897 Total expenses (excluding losses)   99,959 81,040
(8,632) (16,728) Operating balance before gains/(losses)   (18,396) (6,315)
1,250 5,144 Net gains/(losses) on financial instruments 12 4,619 2,522
181 1,890 Net gains/(losses) on non-financial instruments 13 79 (960)
1,431 7,034 Total gains/(losses)   4,698 1,562
134 257 Net surplus from associates and joint ventures   237 227
(7,067) (9,437) Operating balance (including minority interest)   (13,461) (4,526)
- - Operating balance attributable to minority interest in Air New Zealand   101 17
(7,067) (9,437) Operating balance   (13,360) (4,509)

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

Statement of Comprehensive Income

for the year ended 30 June 2011

Statement of Comprehensive Income for the year ended 30 June 2011
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
(7,067) (9,437) Operating balance (including minority interest) (13,461) (4,526)
    Other comprehensive income    
- 69 Revaluation of physical assets (443) 129
- - Share of associates revaluation of physical assets - 67
5 (52) Effective portion of changes in the fair value of cash flow hedges (252) (112)
(1) (16) Net change in fair value of cash flow hedges transferred to operating profit 17 (62)
- (8) Net change in fair value of cash flow hedges transferred to the hedged item 95 (3)
- (37) Foreign currency translation differences for foreign operations (37) (11)
1 4 Valuation gains/(losses) on investments available for sale taken to reserves (1) 3
(1) 8 Other movements 1 (1)
4 (32) Total other comprehensive income (620) 10
(7,063) (9,469) Total comprehensive income (14,081) (4,516)
    Attributable to:    
- - - minority interest in Air New Zealand (74) (34)
(7,063) (9,469) - the Crown (14,007) (4,482)
(7,063) (9,469) Total comprehensive income (14,081) (4,516)

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 2011

Analysis of Expenses by Functional Classification for the year ended 30 June 2011
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Total Crown expenses

   
26,127 25,637 Social security and welfare 25,324 24,206
363 289 GSF pension expenses 311 333
13,379 13,118 Health 13,068 12,673
12,861 12,783 Education 12,406 12,440
3,922 6,083 Core government services 5,515 2,830
3,746 3,724 Law and order 3,567 3,354
1,862 1,850 Defence 1,778 1,771
8,184 8,244 Transport and communications 8,402 7,991
8,114 14,078 Economic and industrial services 18,818 7,541
1,742 1,624 Primary services 1,603 1,373
3,344 3,805 Heritage, culture and recreation 3,437 2,584
1,102 1,781 Housing and community development 1,655 1,087
1,071 625 Other 479 80
4,612 3,506 Finance costs 3,596 2,777
394 - Forecast new operating spending - -
(410) (250) Top-down expense adjustment - -
90,413 96,897 Total Crown expenses excluding losses 99,959 81,040

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

Analysis of Expenses by Functional Classification for the year ended 30 June 2011 (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Core Crown expenses

   
22,120 22,175 Social security and welfare 22,005 21,185
357 281 GSF pension expenses 305 328
14,043 13,774 Health 13,753 13,128
11,992 12,039 Education 11,650 11,724
3,979 6,357 Core government services 5,563 2,974
3,537 3,526 Law and order 3,382 3,191
1,912 1,890 Defence 1,809 1,814
2,417 2,330 Transport and communications 2,281 2,345
2,828 2,755 Economic and industrial services 2,609 2,839
757 731 Primary services 706 507
2,037 2,437 Heritage, culture and recreation 1,966 1,281
370 1,046 Housing and community development 876 306
1,088 625 Other 479 80
3,230 3,078 Finance costs 3,066 2,311
394 - Forecast new operating spending - -
(410) (250) Top-down expense adjustment - -
70,651 72,794 Total core Crown expenses excluding losses 70,450 64,013

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

Statement of Cash Flows

for the year ended 30 June 2011

Statement of Cash Flows for the year ended 30 June 2011
Forecast
30 June 2011
    Actual
Budget 10
$m
Budget 11
$m
  Note 30 June 2011
$m
30 June 2010
$m
   

Cash Flows From Operations

     
   

Cash was provided from

     
52,681 50,094 Taxation receipts 2 50,418 50,104
4,792 4,768 Other sovereign receipts 2 4,693 4,268
15,173 15,027 Sales of goods and services   14,899 14,411
3,592 2,558 Interest and dividend receipts   2,682 2,378
2,960 3,204 Other operating receipts   2,990 2,974
79,198 75,651 Total cash provided from operations   75,682 74,135
   

Cash was disbursed to

     
22,642 22,426 Transfer payments and subsidies   22,172 21,335
54,693 56,604 Personnel and operating payments   55,152 50,767
3,979 3,378 Interest payments   3,107 2,420
394 - Forecast new operating spending   - -
(410) (250) Top-down expense adjustment   - -
81,298 82,158 Total cash disbursed to operations   80,431 74,522
(2,100) (6,507) Net cash flows from operations   (4,749) (387)
   

Cash Flows From Investing Activities

     
   

Cash was provided from

     
450 1,221 Sale of physical assets   521 437
35,401 43,891 Sale of shares and other securities   42,120 42,248
- - Sale of intangible assets   1 -
2,286 1,630 Repayment of advances   2,295 3,521
- - Cash balance in relation to AMI   152 -
1 45 Sale of investments in associates   53 70
38,138 46,787 Total cash provided from investing activities   45,142 46,276
   

Cash was disbursed to

     
8,292 8,523 Purchase of physical assets   6,517 6,302
36,489 48,581 Purchase of shares and other securities   50,525 40,156
513 432 Purchase of intangible assets   601 377
3,712 3,974 Issue of advances   3,298 3,831
469 24 Acquisition of investments in associates   32 268
282 - Forecast for new capital spending   - -
(300) (100) Top-down capital adjustment   - -
49,457 61,434 Total cash disbursed to investing activities   60,973 50,934
(11,319) (14,647) Net cash flows from investing activities   (15,831) (4,658)
(13,419) (21,154) Net cash flows from operating and investing activities   (20,580) (5,045)

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

Statement of Cash Flows (continued) for the year ended 30 June 2011
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
(13,419) (21,154) Net cash flows from operating and investing activities (20,580) (5,045)
   

Cash Flows From Financing Activities

   
   

Cash was provided from

   
104 359 Issue of circulating currency 234 15
13,464 22,705 Issue of Government stock and treasury bills1 25,302 13,866
1 2,360 Issue of foreign currency borrowings 2,379 3,414
7,578 8,487 Issue of other New Zealand dollar borrowings 6,245 5,091
21,147 33,911 Total cash provided from financing activities 34,160 22,386
   

Cash was disbursed to

   
1,746 3,000 Repayment of Government stock and treasury bills1 4,214 6,709
5,321 3,892 Repayment of foreign currency borrowings 570 118
680 4,362 Repayment of other New Zealand dollar borrowings 6,151 8,842
- - Dividends paid to minority interests 13 13
7,747 11,254 Total cash disbursed to financing activities 10,948 15,682
13,400 22,657 Net cash flows from financing activities 23,212 6,704
(19) 1,503 Net movement in cash 2,632 1,659
6,143 7,774 Opening cash balance 7,774 6,268
2 (174) Foreign-exchange gains/(losses) on opening cash (605) (153)
6,126 9,103 Closing cash balance 9,801 7,774
  1. Net issues of Government stock and treasury bills is after elimination of holdings by entities such as NZS Fund, ACC and EQC. Further information on the proceeds and repayments of Government stock ("domestic bonds") is available on page 183.

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

Statement of Cash Flows (continued) for the year ended 30 June 2011
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Reconciliation Between the Net Cash Flows from Operations and the Operating Balance

   
(2,100) (6,507) Net Cash Flows from Operations (4,749) (387)
    Items included in the operating balance but not in net cash flows from operations    
   

Gains/(losses)

   
1,250 5,144 Net gains/(losses) on financial instruments 4,619 2,522
181 1,890 Net gains/(losses) on non-financial instruments 79 (960)
1,431 7,034 Total gains/(losses) 4,698 1,562
   

Other Non-cash Items in Operating Balance

   
(4,428) (4,786) Depreciation and amortisation (4,682) (4,229)
(896) (805) Write-down on initial recognition of financial assets (807) (855)
5 52 Impairment of financial assets (excl receivables) 105 33
337 382 Decrease/(increase) in defined benefit retirement plan liabilities 358 284
(1,329) (5,922) Decrease/(increase) in insurance liabilities (13,179) (974)
135 260 Other 238 244
(6,176) (10,819) Total other non-cash items in operating balance (17,967) (5,497)
   

Movements in Working Capital

   
225 3,779 Increase/(decrease) in receivables 6,605 (338)
(162) (68) Increase/(decrease) in accrued interest (599) (420)
51 150 Increase/(decrease) in inventories 149 78
(7) (13) Increase/(decrease) in prepayments 39 18
109 195 Decrease/(increase) in deferred revenue (46) (202)
(438) (3,188) Decrease/(increase) in payables/provisions (1,490) 677
(222) 855 Total movements in working capital 4,658 (187)
(7,067) (9,437) Operating balance (13,360) (4,509)

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

Statement of Changes in Net Worth

for the year ended 30 June 2011

Statement of Changes in Net Worth for the year ended 30 June 2011
Forecast
Total Net Worth
    Actual
Budget 10
$m
Budget 11
$m
  Note Taxpayer funds
$m
Reserves
$m
Minority interest
$m
Total net
worth
$m
99,515 99,515 Net worth at 30 June 2009   36,382 62,686 447 99,515
(3,179) (4,526) Operating balance   (4,509) - (17) (4,526)
323 196 Net revaluations   - 196 - 196
(180) (96) Transfers to/(from) reserves   (785) 689 - (96)
- (60) (Gains)/losses transferred to the statement of financial performance   - (60) - (60)
- (30) Other movements   (1) (12) (17) (30)
(3,036) (4,516) Total comprehensive income   (5,295) 813 (34) (4,516)
- (11) Transactions with minority interest in Air New Zealand   - - (11) (11)
96,479 94,988 Net worth at 30 June 2010   31,087 63,499 402 94,988
(7,067) (9,437) Operating Balance   (13,360) - (101) (13,461)
- 69 Net revaluations   - (443) - (443)
5 (44) Transfers to/(from) reserves   460 (739) - (279)
(1) (16) (Gains)/losses transferred to the statement of financial performance   - 17 - 17
- (41) Other movements   1 57 27 85
(7,063) (9,469) Total comprehensive income   (12,899) (1,108) (74) (14,081)
- - Transactions with minority interest in Air New Zealand   - - (20) (20)
89,416 85,519 Net worth at 30 June 2011 28 18,188 62,391 308 80,887

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

Statement of Financial Position

as at 30 June 2011

Statement of Financial Position as at 30 June 2011
Forecast
30 June 2011
    Actual
Budget 10
$m
Budget 11
$m
  Note 30 June 2011
$m
30 June 2010
$m
   

Assets

     
6,126 9,103 Cash and cash equivalents   9,801 7,774
14,038 17,514 Receivables 14 21,690 13,884
46,220 49,006 Marketable securities, deposits and derivatives in gain 15 49,056 43,687
17,771 14,206 Share investments 16 14,248 12,179
20,411 19,851 Advances 17 20,567 18,447
1,228 1,309 Inventory 18 1,308 1,160
1,488 1,668 Other assets 19 1,996 1,661
117,742 116,933 Property, plant & equipment 20 114,854 113,330
9,440 9,398 Equity accounted investments 21 9,301 9,049
2,596 2,524 Intangible assets and goodwill 22 2,394 2,184
282 - Forecast for new capital spending   - -
(425) (100) Top-down capital adjustment   - -
236,917 241,412 Total assets   245,215 223,355
   

Liabilities

     
4,251 4,380 Issued currency   4,254 4,020
10,001 9,169 Payables 23 11,099 9,931
1,222 1,433 Deferred revenue   1,674 1,628
89,416 91,003 Borrowings 24 90,245 69,733
28,635 31,802 Insurance liabilities 25 39,314 27,131
8,821 9,271 Retirement plan liabilities 26 10,156 9,940
5,155 8,835 Provisions 27 7,586 5,984
147,501 155,893 Total liabilities   164,328 128,367
89,416 85,519 Total assets less total liabilities   80,887 94,988
   

Net Worth

     
26,983 21,720 Taxpayer funds   18,188 31,087
62,086 63,600 Property, plant and equipment revaluation reserve   62,690 63,593
(100) (203) Other reserves   (299) (94)
88,969 85,117 Total net worth attributable to the Crown   80,579 94,586
447 402 Net worth attributable to minority interest in Air New Zealand   308 402
89,416 85,519 Total net worth 28 80,887 94,988

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

Statement of Segments

Current Year Actual vs Estimated Actuals
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
  Actual
2011
Estimated
Actuals
2011
Actual
2011
Estimated
Actuals
2011
Actual
2011
Estimated
Actuals
2011
Actual
2011
Estimated
Actuals
2011
Actual
2011
Estimated
Actuals
2011
  $m $m $m $m $m $m $m $m $m $m

Revenue

                   
Taxation revenue 51,557 51,189 - - - - (429) (549) 51,128 50,640
Other sovereign revenue 1,275 1,346 5,080 5,209 - - (1,074) (1,111) 5,281 5,444
Revenue from core Crown funding - - 23,442 23,552 - - (23,442) (23,552) - -
Sales of goods and services 1,443 1,487 1,795 1,703 12,510 12,640 (664) (702) 15,084 15,128
Interest revenue and dividends 2,169 2,185 1,234 1,106 801 763 (1,634) (1,436) 2,570 2,618
Other revenue 1,106 743 6,485 5,444 935 1,017 (1,026) (865) 7,500 6,339
Total Revenue (excluding gains) 57,550 56,950 38,036 37,014 14,246 14,420 (28,269) (28,215) 81,563 80,169

Expenses

                   
Transfer payments and subsidies 22,227 22,396 - - - - (55) (56) 22,172 22,340
Personnel expenses 5,996 5,905 10,410 10,309 2,695 2,654 (13) (9) 19,088 18,859
Other operating expenses 39,161 41,663 32,670 27,566 9,727 9,841 (26,455) (26,628) 55,103 52,442
Interest expenses 3,066 3,078 248 247 1,027 1,010 (745) (829) 3,596 3,506
Forecast new operating spending and top down adjustment - (250) - - - - - - - (250)
Total Expenses (excluding losses) 70,450 72,792 43,328 38,122 13,449 13,505 (27,268) (27,522) 99,959 96,897
Operating Balance before gains/(losses) (12,900) (15,842) (5,292) (1,108) 797 915 (1,001) (693) (18,396) (16,728)
Gains/(losses) 3,633 4,951 2,149 2,523 (470) 49 (276) (232) 5,036 7,291
Operating Balance (9,267) (10,891) (3,143) 1,415 327 964 (1,277) (925) (13,360) (9,437)

Assets

                   
Financial assets 76,475 74,041 36,391 33,897 20,241 17,613 (17,745) (15,871) 115,362 109,680
Property, plant and equipment 29,549 30,334 48,480 49,722 36,825 36,877 - - 114,854 116,933
Investments in associates, CEs and SOEs 30,093 29,878 7,979 7,977 197 382 (28,968) (28,839) 9,301 9,398
Other assets 2,848 2,948 808 789 2,097 1,792 (55) (28) 5,698 5,501
Forecast adjustments - (100) - - - - - - - (100)
Total Assets 138,965 137,101 93,658 92,385 59,360 56,664 (46,768) (44,738) 245,215 241,412

Liabilities

                   
Borrowings 76,827 76,942 5,123 5,129 23,099 22,600 (14,804) (13,668) 90,245 91,003
Other liabilities 27,207 26,427 45,105 38,439 9,021 6,732 (7,250) (6,708) 74,083 64,890
Total Liabilities 104,034 103,369 50,228 43,568 32,120 29,332 (22,054) (20,376) 164,328 155,893
Net Worth 34,931 33,732 43,430 48,817 27,240 27,332 (24,714) (24,362) 80,887 85,519
Cost of Acquisition of Physical Assets 1,465 1,682 2,462 2,839 2,590 4,002 - - 6,517 8,523
Current Year Actual vs Prior Year Actual
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
  Actual
2011
Actual
2010
Actual
2011
Actual
2010
Actual
2011
Actual
2010
Actual
2011
Actual
2010
Actual
2011
Actual
2010
  $m $m $m $m $m $m $m $m $m $m

Revenue

                   
Taxation revenue 51,557 50,744 - - - - (429) (397) 51,128 50,347
Other sovereign revenue 1,275 1,015 5,080 4,840 - - (1,074) (1,173) 5,281 4,682
Revenue from core Crown funding - - 23,442 23,084 - - (23,442) (23,084) - -
Sales of goods and services 1,443 1,387 1,795 1,642 12,510 11,979 (664) (677) 15,084 14,331
Interest revenue and dividends 2,169 2,135 1,234 1,146 801 626 (1,634) (1,592) 2,570 2,315
Other revenue 1,106 935 6,485 1,934 935 974 (1,026) (793) 7,500 3,050
Total Revenue (excluding gains) 57,550 56,216 38,036 32,646 14,246 13,579 (28,269) (27,716) 81,563 74,725

Expenses

                   
Transfer payments and subsidies 22,227 21,484 - - - - (55) (271) 22,172 21,213
Personnel expenses 5,996 5,991 10,410 10,043 2,695 2,455 (13) (12) 19,088 18,477
Other operating expenses 39,161 34,227 32,670 21,379 9,727 9,512 (26,455) (26,545) 55,103 38,573
Interest expenses 3,066 2,311 248 245 1,027 845 (745) (624) 3,596 2,777
Total Expenses (excluding losses) 70,450 64,013 43,328 31,667 13,449 12,812 (27,268) (27,452) 99,959 81,040
Operating Balance before gains/(losses) (12,900) (7,797) (5,292) 979 797 767 (1,001) (264) (18,396) (6,315)
Gains/(losses) 3,633 797 2,149 1,394 (470) (132) (276) (253) 5,036 1,806
Operating Balance (9,267) (7,000) (3,143) 2,373 327 635 (1,277) (517) (13,360) (4,509)

Assets

                   
Financial assets 76,475 65,981 36,391 28,136 20,241 16,065 (17,745) (14,211) 115,362 95,971
Property, plant and equipment 29,549 29,986 48,480 48,109 36,825 35,235 - - 114,854 113,330
Investments in associates, CEs and SOEs 30,093 28,663 7,979 7,760 197 223 (28,968) (27,597) 9,301 9,049
Other assets 2,848 2,585 808 743 2,097 1,716 (55) (39) 5,698 5,005
Total Assets 138,965 127,215 93,658 84,748 59,360 53,239 (46,768) (41,847) 245,215 223,355

Liabilities

                   
Borrowings 76,827 57,583 5,123 4,835 23,099 19,747 (14,804) (12,432) 90,245 69,733
Other liabilities 27,207 24,963 45,105 33,421 9,021 6,612 (7,250) (6,362) 74,083 58,634
Total Liabilities 104,034 82,546 50,228 38,256 32,120 26,359 (22,054) (18,794) 164,328 128,367
Net Worth 34,931 44,669 43,430 46,492 27,240 26,880 (24,714) (23,053) 80,887 94,988
Cost of Acquisition of Physical Assets 1,465 1,667 2,462 2,433 2,590 2,202 - - 6,517 6,302

Notes to the Financial Statements

Note 1: Summary of Accounting Policies

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

These financial statements were authorised for issue by the Minister of Finance on 30 September 2011.

Reporting Entity

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

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

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

Basis of Preparation

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

The financial statements are prepared on an accrual basis.

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

Judgements and Estimations

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

A second area of uncertainty relates to the immature nature of the claims experience available to assist in estimating the claims and provisions arising from the Canterbury earthquakes. Actuarial valuations of these liabilities using the best available information have been used, however it is common in such cases for adjustments to be required as the claims experience develops.

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

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

Early Adoption Standards and Interpretations

The Government has elected to early-adopt all NZ IFRSs and Interpretations applicable to public benefit entities that had been approved by the New Zealand Accounting Standards Review Board as at 30 June 2011 but that are not yet effective, with the exception of NZ IFRS 9: Financial Instruments. The first of three phases of this new standard (which is incomplete as at 30 June 2011) were approved by the Accounting Standards Review Board in November 2009 and November 2010. The standard addresses the issues of classification and measurement of financial assets and financial liabilities and becomes effective for annual reporting periods commencing on or after 1 January 2013.

An initial assessment of standards approved since 30 June 2010 do not indicate any issues which would have a material impact on these financial statements.

Significant Accounting Policies

Reporting and Forecast Period

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

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

Basis of Combination

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

Core Crown entities

  • 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
  • AMI Insurance Limited
  • Organisations listed in Schedule 4 of the Public Finance Act 1989

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

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

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

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

Income

Taxation revenue levied through the Crown's sovereign power

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

Where possible, taxation revenue is recognised at the time the debt to the Crown arises.

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

Revenue earned through operations

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

Interest income

Interest income is accrued using the effective interest rate method.

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

Dividend income

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

Rental income

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

Donated or subsidised assets

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

 

Expenses

General

Expenses are recognised in the period to which they relate.

Welfare benefits and entitlements

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

Grants and subsidies

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

Interest expense

Interest expense is accrued using the effective interest rate method.

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

Foreign Currency

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

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

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

Sovereign Receivables and Taxes Repayable

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

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

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

Financial instruments

Financial assets

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

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

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

Loans and receivables are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method (refer interest income policy). Loans and receivables issued with a duration 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 as fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance.

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

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

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

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

Financial liabilities

 
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 as fair value through profit and loss
Issued currency Not designated: Recognised at face value

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

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

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

Derivatives

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

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

Hedging

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

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

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

(a) Cash flow hedge

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

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

(b) Fair value hedge

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

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

Note 1: Summary of Accounting Policies (continued)

Inventories

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

Inventories include unissued currency and harvested agricultural produce (eg, logs and wool).

The cost of harvested agricultural produce is measured at fair value less estimated costs to sell at the point of harvest.

Property, Plant and Equipment (PPE)

Items of property, plant and equipment 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 property, plant and equipment. Where an asset is acquired for nil or nominal consideration the asset is recognised initially at fair value, where fair value can be reliably determined, and as income in the statement of financial performance.

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

Subsequent to initial recognition, classes of property, plant and equipment are accounted for as set out below.

 
Class of PPE Accounting policy
Land and buildings

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

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

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

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

Specialist military equipment

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

Valuations are obtained through specialist assessment by New Zealand Defence Force advisers, and the bases of these valuations are confirmed as appropriate by an independent valuer.

State highways State highways are recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued.  Land associated with the state highways is valued using an opportunity cost based on adjacent use, as an approximation to fair value.
Rail network The rail network is recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued. Land associated with the rail network is valued using an opportunity cost based on adjacent use, as an approximation to fair value.
Aircraft Aircraft (excluding specialised military equipment) are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
Electricity distribution network Electricity distribution network assets are recorded at cost, less depreciation and impairment losses accumulated since the assets were purchased.
Electricity generation assets Electricity generation assets are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
Specified cultural and heritage assets Specified cultural and heritage assets comprise national parks, conservation areas and related recreational facilities, as well as National Archives holdings and the collections of the National Library, Parliamentary Library and Te Papa. Such physical assets are recorded at fair value less subsequent impairment losses and, for non-land assets, less subsequent accumulated depreciation. Assets are not reported with a financial value in cases where they are not realistically able to be reproduced or replaced, and when they do not generate cash flows and where no market exists to provide a valuation.
Other plant and equipment Other plant and equipment, which includes motor vehicles and office equipment, are recorded at cost less depreciation and impairment losses accumulated since the assets were purchased.

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

Items of property 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 property is recorded at its optimised depreciated replacement cost, this cost is based on the estimated present cost of constructing the existing item of property by the most appropriate method of construction, less allowances for physical deterioration and optimisation for obsolescence and relevant surplus capacity. Where an item of property is recorded at its optimised depreciated replacement cost, the cost does not include any borrowing costs.

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

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

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

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

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

Typically, the estimated useful lives of different classes of property, plant and equipment are as follows:

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

Specified heritage and cultural assets are generally not depreciated.

Equity Accounted Investments

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

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

Biological Assets

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

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

Intangible Assets

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

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

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

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

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

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

Goodwill is tested for impairment annually.

Note 1: Summary of Accounting Policies (continued)

Non-current Assets Held for Sale and Discontinued Operations

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

Investment Property

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

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

Employee Benefits

Pension liabilities

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

Other employee entitlements

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

Termination benefits

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

Insurance Contracts

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

Reinsurance

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

Reinsurance and other recoveries receivable

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

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

Deferred Acquisition Costs

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

Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the insurance contracts to which they relate. This pattern of amortisation corresponds to the earning pattern of the corresponding premium revenue. Risks under the Group's general insurance contracts cover a period of up to 12 months, therefore, deferred acquisition costs are amortised within 1 year.

Leases

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

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

Other Liabilities and Provisions

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

Contingent Liabilities and Contingent Assets

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

Commitments

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

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

Commitments are classified as:

  • capital commitments: aggregate amount of capital expenditure contracted for but not recognised as paid or provided for at balance date
  • non-cancellable operating leases with a lease term of more than one year, and
  • other non-cancellable commitments (these may include consulting contracts, cleaning contracts and ship charters).

Interest commitments on debts and commitments relating to employment contracts are not included in the Statement of Commitments.

Comparatives

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

Comparatives referred to as Budget 10 were forecasts published in the 2010 Budget Economic and Fiscal Update while Budget 11 were forecasts published in the 2011 Budget Economic and Fiscal Update. These forecasts include budget adjustments for new unallocated spending during the year (both operating and capital) and top-down adjustments which reduce the bias for forecast expenditure by departments to reflect maximum spending limits instead of mid-point estimates.

Segment Analysis

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

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

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

Related Parties

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

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

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

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

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

Note 2: Tax and Levies Collected through the Crown's Sovereign Power (Accrual)

Note 2: Tax and Levies Collected through the Crown's Sovereign Power (Accrual)
Forecast
30 June 2011
  Actual
Budget 10 Budget 11   30 June 2011 30 June 2010
$m $m   $m $m
   

Direct Income Tax Revenue (accrual)

   
   

Individuals

   
20,174 20,670 Source deductions 20,857 21,774
4,403 3,822 Other persons 3,791 3,987
(1,484) (1,681) Refunds (1,679) (1,831)
430 461 Fringe benefit tax 462 461
23,523 23,272 Total individuals 23,431 24,391
   

Corporate Tax

   
8,214 6,907 Gross companies tax 6,687 6,698
(376) (363) Refunds (197) (379)
628 498 Non-resident withholding tax 467 884
8 1 Foreign-source dividend withholding payments - (3)
8,474 7,043 Total corporate tax 6,957 7,200
   

Other Direct Income Tax

   
1,465 1,707 Resident withholding tax on interest income 1,704 1,804
240 203 Resident withholding tax on dividend income 195 130
1 2 Estate and gift duties 2 2
1,706 1,912 Total other direct income tax 1,901 1,936
33,703 32,227 Total direct income tax 32,289 33,527
   

Indirect Income Tax Revenue (accrual)

   
   

Goods and Services Tax

   
23,968 23,253 Gross goods and services tax 23,484 19,797
(9,524) (10,047) Refunds (9,776) (7,880)
14,444 13,206 Total goods and services tax 13,708 11,917
   

Other Indirect Taxation

   
955 995 Road user charges 1,016 910
907 862 Petroleum fuels excise - domestic production 872 805
657 625 Alcohol excise - domestic production 623 600
209 238 Tobacco excise - domestic production 220 217
600 650 Petroleum fuels excise - imports1 575 622
242 234 Alcohol excise - imports1 229 225
1,020 953 Tobacco excise - imports1 924 851
198 154 Other customs duty 188 175
228 218 Gaming duties 214 219
175 169 Motor vehicle fees 172 171
81 73 Approved issuer levy and cheque duty 62 69
38 36 Energy resources levies 36 39
5,310 5,207 Total other indirect taxation 5,131 4,903
19,754 18,413 Total indirect taxation 18,839 16,820
53,457 50,640 Total taxation revenue 51,128 50,347
   

Other Sovereign Revenue (accrual)

   
3,823 3,670 ACC levies 3,586 3,261
309 313 Fire service levies 312 301
87 87 EQC levies 88 86
629 535 Child support 523 572
284 198 Court fines 190 238
627 641 Other miscellaneous items 582 224
5,759 5,444 Total other sovereign revenue 5,281 4,682
59,216 56,084 Total sovereign revenue 56,409 55,029

1. Customs excise-equivalent duty.

Note 2: Tax and Levies Collected through the Crown's Sovereign Power (Cash)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Direct Income Tax Receipts (cash)

   
   

Individuals

   
20,314 20,575 Source deductions 20,699 21,744
4,875 4,320 Other persons 4,386 4,630
(2,255) (2,445) Refunds (2,463) (2,793)
433 456 Fringe benefit tax 457 469
23,367 22,906 Total individuals 23,079 24,050
   

Corporate Tax

   
9,051 7,871 Gross companies tax 7,588 8,650
(1,314) (970) Refunds (772) (1,644)
627 494 Non-resident withholding tax 462 889
8 1 Foreign-source dividend withholding payments (1) 6
8,372 7,396 Total corporate tax 7,277 7,901
   

Other Direct Income Tax

   
1,463 1,714 Resident withholding tax on interest income 1,701 1,833
240 202 Resident withholding tax on dividend income 196 114
1 2 Estate and gift duties 2 2
1,704 1,918 Total direct other income tax 1,899 1,949
33,443 32,220 Total direct income tax 32,255 33,900
   

Indirect Tax Receipts (cash)

   
   

Goods and Services Tax

   
23,052 22,056 Gross goods and services tax 22,162 18,797
(9,124) (9,393) Refunds (9,177) (7,456)
13,928 12,663 Total goods and services tax 12,985 11,341
   

Other Indirect Taxation

   
955 995 Road user charges 1,015 908
907 862 Petroleum fuels excise - domestic production 869 805
657 625 Alcohol excise - domestic production 625 622
209 238 Tobacco excise - domestic production 181 214
2,060 1,991 Customs duty 2,005 1,805
228 220 Gaming duties 216 218
175 169 Motor vehicle fees 171 195
81 75 Approved issuer levy and cheque duty 60 59
38 36 Energy resources levies 36 37
5,310 5,211 Total other indirect taxation 5,178 4,863
19,238 17,874 Total indirect taxation 18,163 16,204
52,681 50,094 Total tax receipts collected 50,418 50,104
   

Other Sovereign Receipts (cash)

   
3,761 3,688 ACC levies 3,612 3,291
309 313 Fire service levies 312 301
87 90 EQC levies 88 86
207 218 Child support 208 190
182 177 Court fines 179 184
246 282 Other miscellaneous items 294 216
4,792 4,768 Total other sovereign receipts 4,693 4,268
57,473 54,862 Total sovereign receipts 55,111 54,372

Note 3: Sales of Goods and Services

Note 3: Sales of Goods and Services
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
8,124 7,786 Sales of goods 7,590 7,222
112 116 Deposit guarantee schemes - guarantee fees 118 163
7,163 7,226 Rendering of services 7,376 6,946
15,399 15,128 Total sales of goods and services 15,084 14,331
   

By source

   
1,481 1,487 Core Crown 1,443 1,387
14,057 14,391 Crown entities 14,680 14,107
12,849 12,640 State-owned enterprises 12,510 11,979
(12,988) (13,390) Inter-segment eliminations (13,549) (13,142)
15,399 15,128 Total sales of goods and services 15,084 14,331

Note 4: Interest Revenue and Dividends

Note 4: Interest Revenue and Dividends
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
506 501 Student loans (interest unwind) 484 463
236 273 Other financial assets classified as amortised cost or available for sale 913 645
4 3 Financial assets classified as held for trading 40 3
2,736 1,488 Financial assets classified as fair value through profit and loss 705 815
3,482 2,265 Total interest revenue 2,142 1,926
581 353 Dividends 428 389
4,063 2,618 Total interest revenue and dividends 2,570 2,315
   

By source

   
2,487 2,185 Core Crown 2,169 2,135
939 1,106 Crown entities 1,234 1,146
1,550 763 State-owned enterprises 801 626
(913) (1,436) Inter-segment eliminations (1,634) (1,592)
4,063 2,618 Total interest revenue and dividends 2,570 2,315
   

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

   
    Impaired student loans 420 463
    Impaired other financial assets classified as amortised cost or available for sale 7 4
    Total interest revenue on impaired financial assets 427 467

Note 5: Other Revenue

Note 5: Other Revenue
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
535 416 Sale of royalties 399 353
1,062 1,091 Rental income 1,082 1,042
- 3,200 EQC insurance claim on reinsurers 4,185 -
1,506 1,632 Other revenue 1,834 1,655
3,103 6,339 Total other revenue 7,500 3,050

Note 6: Transfer Payments and Subsidies

Note 6: Transfer Payments and Subsidies
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Social Assistance Grants

   
8,822 8,833 New Zealand superannuation 8,830 8,290
2,239 2,214 Family tax credit 2,139 2,168
1,756 1,765 Domestic purposes benefit 1,757 1,693
1,319 1,307 Invalids benefit 1,306 1,303
1,221 1,202 Accommodation supplement 1,197 1,154
969 959 Unemployment benefit 943 930
760 742 Sickness benefit 743 710
597 592 In-work tax credit 585 595
656 626 Student allowances 620 570
559 559 Income related rents 553 522
421 410 Disability allowances 409 411
1,645 1,599 Other social assistance benefits 1,553 1,408
20,964 20,808 Total social assistance grants 20,635 19,754
   

Subsidies

   
1,179 1,039 KiwiSaver subsidies 1,042 1,024
   

Other transfer payments

   
485 493 Official development assistance 495 435
22,628 22,340 Total transfer payments and subsidies 22,172 21,213

Note 7: Personnel Expenses

Note 7: Personnel Expenses
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
17,923 17,705 Salaries and wages 17,913 17,282
368 304 Costs incurred on GSF and other defined benefit plans 314 341
384 352 Costs incurred on SSRSS and other defined contribution plans 468 380
434 498 Other personnel expenses 393 474
19,109 18,859 Total personnel expenses 19,088 18,477
   

By source

   
6,076 5,905 Core Crown 5,996 5,991
10,516 10,309 Crown entities 10,410 10,043
2,526 2,654 State-owned enterprises 2,695 2,455
(9) (9) Inter-segment eliminations (13) (12)
19,109 18,859 Total personnel expenses 19,088 18,477
   

Key management personnel compensation

   
    Salaries and other short-term employee benefits 8 8
    Post-employment benefits - -
    Other long-term benefits - -
    Termination benefits - -
      8 8

Key management personnel are the 27 Ministers of the Crown who are members of the Executive Council.

Note 8: Depreciation and Amortisation

Note 8: Depreciation and Amortisation
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Depreciation expense

   
1,116 1,120 Buildings 1,080 1,073
105 130 Electricity distribution network 147 140
399 384 Electricity generation assets 374 356
212 197 Aircraft (excluding military) 171 173
386 377 State highways 408 403
208 229 Rail network 210 208
315 279 Specialist military equipment 272 286
21 19 Specified cultural and heritage assets 19 17
1,072 1,032 Other plant and equipment 1,046 926
3,834 3,767 Total depreciation expense 3,727 3,582
594 1,019 Amortisation and impairment of non-financial assets 955 647
4,428 4,786 Total depreciation and amortisation 4,682 4,229

Note 9: Other Operating Expenses

Note 9: Other Operating Expenses
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
19 343 Retail deposit guarantee scheme - expenses accrued for entities
in default and valuation of receivables
282 (25)
5,009 4,940 Donations and ex-gratia payments 4,220 3,486
6 6 Fees paid to audit firms (refer below) 7 4
196 251 Inventory expenses 467 526
1,711 1,528 Impairment of financial assets 1,300 1,278
- - Impairment of inventory 8 11
447 464 Lottery prize payments 521 436
1,116 1,111 Rental and leasing costs 1,156 1,121
896 805 Write-down on initial recognition of financial assets 807 855
26,527 28,689 Other operating expenses 27,061 23,646
35,927 38,137 Total other operating expenses 35,829 31,338
   

By source

   
37,200 39,803 Core Crown 37,454 32,822
16,374 16,562 Crown entities 16,368 16,854
8,814 8,401 State-owned enterprises 8,125 8,206
(26,461) (26,629) Inter-segment eliminations (26,118) (26,544)
35,927 38,137 Total other operating expenses 35,829 31,338

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. Items disclosed separately are those required by financial reporting standards.

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

Note 9: Other Operating Expenses (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Audit and related expenses

   
Auditor-General fees for the audit of financial statements1 34 34
Auditor-General fees for assurance and related services 1 1
Fees for other services 1 -
  36 35
Inter-segment eliminations (36) (35)
Total audit and related expenses - -

Fees for other work2

   
Fees for assurance and related services 4 2
Fees for tax services 1 1
Fees for other services 2 1
Fees paid to audit firms 7 4

1. The audit of financial statements are those of the Government reporting entity and its sub-entities. Audit fees are eliminated because the Office of the Auditor-General is consolidated into these financial statements.

2. External auditing firms carry out other work for entities that they audit on behalf of the Auditor-General.

Note 10: Interest Expenses

Note 10: Interest Expenses
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
1,783 3,216 Financial liabilities classified as amortised cost 3,060 2,221
- - Financial liabilities classified as held for trading 7 -
2,754 211 Financial liabilities classified as fair value through profit and loss 478 503
75 79 Interest unwind on provisions 51 53
4,612 3,506 Total interest expenses 3,596 2,777
   

By source

   
3,230 3,078 Core Crown 3,066 2,311
181 247 Crown entities 248 245
1,733 1,010 State-owned enterprises 1,027 845
(532) (829) Inter-segment eliminations (745) (624)
4,612 3,506 Total interest expenses 3,596 2,777

Note 11: Insurance Expenses

Note 11: Insurance Expenses
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By entity

   
3,668 3,103 Accident Compensation Corporation (ACC) 2,979 2,922
39 6,389 Earthquake Commission 11,776 64
- - AMI insurance 151 -
18 27 Other 22 20
- - Inter-segment eliminations (336) -
3,725 9,519 Total insurance expenses 14,592 3,006
   

By type

   
    Property damage claims in relation to Canterbury earthquakes 11,475 -
    Personal accident and injury claims 2,979 2,922
    Other insurance expenses 138 84
    Total insurance expenses 14,592 3,006

Insurance expenses include costs associated with the Canterbury earthquakes. Refer to note 30 for further discussion. These expenses do not include any proceeds from reinsurance. These proceeds are included as “other revenue” in the statement of financial performance.

AMI insurance expenses only include costs incurred after 7 April 2011 (the date that AMI Insurance became controlled by the government and combined as part of the government reporting entity). As a result, the insurance expenses of AMI are not included in the 2010 comparatives.

Claims expense is the sum of claims incurred and claims management expenses relating to claims incurred plus the movement in the outstanding claims liability.

Total claims and other expenses are those related to claims that have occurred prior to reporting date. Within these expenses are expenses relating to actuarial gains/(losses) and operating costs (eg, costs for processing claims and injury prevention promotion) that due to their nature are reported elsewhere in the statement of financial performance (eg, under gains and losses or personnel expenses).

Insurance expenses represents underwriting expenses less those expenses reported elsewhere (ie, insurance expenses largely comprise direct settlement of claims and expected movements in the outstanding liability and unexpired risk liability).

Note 11: Insurance Expenses (continued)
  Actual
Analysis of ACC insurance expense 30 June 2011
$m
30 June 2010
$m

By type

   
ACC claims expense 2,396 3,275
Movement in ACC unexpired risk liability (105) (459)
Other underwriting expenses 90 81
Total ACC claims and other expenses 2,381 2,897
less actuarial gain/(loss) 996 410
less operating costs relating to claims (398) (385)
Total ACC insurance expenses (excluding losses and operations) 2,979 2,922

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

Historical Analysis

Note 11: Insurance Expenses (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m
30 June 2009
$m
30 June 2008
$m

ACC Claims Development

       

Current year net ACC claims incurred

       
Gross claims incurred and related expenses - undiscounted 7,800 7,422 7,511 5,804
Reinsurance and other recoveries - undiscounted - - - -
Net claims incurred - undiscounted 7,800 7,422 7,511 5,804
Discount and discount movement        
- gross claims incurred (4,857) (4,286) (3,996) (2,923)
- reinsurance and other recoveries - - - -
Net discount movement (4,857) (4,286) (3,996) (2,923)
Total current year net claims incurred 2,943 3,136 3,515 2,881

Previous years' net ACC claims incurred

       
Gross claims incurred and related expenses - undiscounted 348 1,188 14,698 6,763
Reinsurance and other recoveries - undiscounted - - - -
Net claims incurred - undiscounted 348 1,188 14,698 6,763

Discount and discount movement

       
- gross claims incurred (895) (1,049) (9,607) (4,522)
- reinsurance and other recoveries - - - -
Net discount movement (895) (1,049) (9,607) (4,522)
Total previous years' net claims incurred (547) 139 5,091 2,241
ACC claims expense 2,396 3,275 8,606 5,122
Note 11: Insurance Expenses (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Net ACC Underwriting Result

   
Premium revenue 3,586 3,261
Recoveries revenue (including reinsurance recovery) - -
ACC underwriting revenue 3,586 3,261
Less claims and other expenses (2,381) (2,897)
Net ACC underwriting surplus/(deficit) 1,205 364

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

Underwriting revenue is reported separately in the financial statements under other sovereign revenue.

Note 11: Insurance Expenses (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

ACC operating cash flows associated with the underwriting result are:

   
Cash receipts 3,612 3,291
Cash payments (3,017) (3,558)
Net ACC operating cash flows 595 (267)
Note 11: Insurance Expenses (continued)
  Actual
Analysis of EQC insurance expense 30 June 2011
$m
30 June 2010
$m

By type

   
EQC claims expense 11,446 25
Movement in EQC unexpired risk liability 281 6
Other underwriting expenses 49 33
Total EQC claims and other expenses 11,776 64
less actuarial gain/(loss) - -
less operating costs relating to claims - -
Total EQC insurance expenses (excluding losses and operations) 11,776 64

Net EQC Underwriting Result

   
Premium revenue 88 86
Recoveries revenue (including reinsurance recovery) 4,185 -
EQC underwriting revenue 4,273 86
Less claims and other expenses 11,776 64
Net EQC underwriting surplus/(deficit) (7,503) 22

EQC operating cash flows associated with the underwriting result are:

   
Cash receipts 88 86
Cash payments 1,230 63
Net EQC operating cash flows (1,142) 23

Prior to the Canterbury earthquakes EQC insurance expenses were immaterial. As a result, an historical analysis of the EQC claims expense has not been provided.

Analysis of the insurance liabilities is provided in note 25.

Note 12: Gains and Losses on Financial Instruments

Note 12: Gains and Losses on Financial Instruments
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
- (15) Foreign exchange gains on financial assets measured at amortised cost 15 -
(22) (131) Foreign exchange losses on financial assets measured at amortised cost (445) (339)
- - Change in fair value of financial assets classified as held for trading 2 (8)
- (9) Gain/(loss) on disposal of financial assets measured at amortised cost (25) (17)
770 1,344 Change in fair value of financial assets classified as fair value through profit and loss (1,979) 457
748 1,189 Net gains/(losses) on financial assets (2,432) 93
- 3 Foreign exchange gain on financial liabilities measured at amortised cost 178 154
- (75) Foreign exchange loss on financial liabilities measured at amortised cost (119) (7)
- - Change in fair value of financial liabilities classified as held for trading - 3
- 177 Gain/(loss) on disposal of financial liabilities measured at amortised cost (5) 5
63 (66) Change in fair value of financial liabilities classified as fair value through profit and loss 270 (37)
63 39 Net gains/(losses) on financial liabilities 324 118
439 3,916 Net gain/(loss) on derivatives 6,727 2,311
1,250 5,144 Net gains/(losses) on financial instruments 4,619 2,522
   

By source

   
1,231 4,455 Core Crown 4,116 2,094
209 1,082 Crown entities 1,058 787
(11) (163) State-owned enterprises (281) (105)
(179) (230) Inter-segment eliminations (274) (254)
1,250 5,144 Net gains/(losses) on financial instruments 4,619 2,522

Note 13: Gains and Losses on Non-Financial Instruments

Note 13: Gains and Losses on Non-Financial Instruments
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
- - Foreign exchange gains/(losses) (153) (40)
- 287 Actuarial gains/(losses) on GSF liability (574) (1,231)
- 1,251 Actuarial gains/(losses) on ACC outstanding claims 996 410
19 225 Other gains/(losses) on non-financial liabilities 187 (80)
(5) (37) Gains/(losses) on disposal or revaluation of property, plant and equipment (565) (170)
166 169 Gains/(losses) on agricultural assets 310 183
- - Gains/(losses) on intangible assets 1 (18)
1 (5) Other gains/(losses) on non-financial assets (123) (14)
181 1,890 Net gains/(losses) on non-financial instruments 79 (960)
   

By source

   
21 441 Core Crown (588) (1,351)
(17) 1,241 Crown entities 931 398
177 208 State-owned enterprises (264) (7)
- - Inter-segment eliminations - -
181 1,890 Net gains/(losses) on non-financial instruments 79 (960)

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

Note 14: Receivables

Note 14: Receivables
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
6,288 6,449 Tax receivables 7,104 6,864
3,769 3,792 Levies, fines and penalty receivables 3,440 3,560
549 470 Social benefit receivables 480 461
10,606 10,711 Sovereign receivables 11,024 10,885
320 723 Recoveries from receiverships 739 -
3,112 6,080 Trade and other receivables 9,927 2,999
14,038 17,514 Total receivables 21,690 13,884
   

By maturity

   
12,718 12,658 Expected to be realised within one year 14,916 12,912
1,320 4,856 Expected to be outstanding for more than one year 6,774 972
14,038 17,514 Total receivables 21,690 13,884
   

By source

   
8,357 8,956 Core Crown 11,376 8,776
5,033 8,218 Crown entities 8,999 4,713
2,229 2,223 State-owned enterprises 3,576 1,740
(1,581) (1,883) Inter-segment eliminations (2,261) (1,345)
14,038 17,514 Total receivables 21,690 13,884

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

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

All sovereign receivables are denominated in New Zealand dollars.

Note 14: Receivables (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Tax Receivables

   
Gross tax receivable 11,248 10,784
Impairment of tax receivables (4,144) (3,920)
Total tax receivables 7,104 6,864

Gross Tax Receivable

   
Current 6,138 5,958
Past due 5,110 4,826
Total gross tax receivable 11,248 10,784
% past due 45% 45%

Impairment of Tax Receivables

   
Opening balance 3,920 3,996
Impairment losses recognised during the year 1,009 591
Amounts written off as uncollectible (785) (667)
Impairment losses reversed - -
Closing balance 4,144 3,920

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

Note 14: Receivables (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m
The estimated recoverable amount of this portfolio and key    
assumptions underpinning the valuation are:    
Recoverable amount of tax receivables (current) 6,102 5,907
Recoverable amount of tax receivables (past due) 1,002 957
Discount rate 6.10% 8.50%
Impact on recoverable amount of a 2% increase in discount rate (16) (15)
Impact on recoverable amount of a 2% decrease in discount rate 17 16

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

Note 14: Receivables (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Ageing of Tax Receivables Past Due (Gross)

   
Less than six months 982 948
Between six months and one year 467 601
Between one year and two years 1,014 1,097
Greater than two years 2,647 2,180
Tax receivables past due 5,110 4,826

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

Note 14: Receivables (continued)

Note 14: Receivables (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Levies, Fines and Penalty Receivables

   
Gross ACC levy receivables 3,251 3,355
Gross other levies, fines and penalty receivables 2,205 2,014
Total gross levies, fines and penalty receivables 5,456 5,369
Impairment of ACC levy receivables (79) (80)
Impairment of other levies, fines and penalty receivables (1,937) (1,729)
Total impairment of receivables (2,016) (1,809)
Total levies, fines and penalty receivables 3,440 3,560

Impairment of ACC Levy Receivables

   
Opening balance 80 72
Impairment losses recognised during the year 11 8
Amounts written off as uncollectible (12) -
Impairment losses reversed - -
Closing balance 79 80
Collective impairment allowance 79 80
Individual impairment allowance - -
Impairment of ACC Levy Receivables 79 80

Impairment of other Levies, Fines and Penalty Receivables

   
Opening balance 1,729 1,428
Impairment losses recognised during the year 370 497
Amounts written off as uncollectible - -
Impairment losses reversed (162) (196)
Closing balance 1,937 1,729
Collective impairment allowance 1,937 1,729
Individual impairment allowance - -
Impairment of other Levies, Fines and Penalty Receivables 1,937 1,729

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

   
Less than six months - 34
Between six months and one year - -
Greater than one year - -
Total levies, fines and penalty receivables past due but not impaired - 34

The ACC levy receivables are short term, so their carrying amount provides a reasonable approximation of their fair value. Of the other levy, fines and penalties receivables, the majority is in the debtor portfolio administered by the Ministry of Justice (ie, court fines, associated court fees and enforcement fees) with a carrying value of $226 million (2010: $230 million). Their carrying amount provides a reasonable approximation of their fair value. The recoverable amount of these Justice receivables is calculated using discounted cash flows (net of estimated service costs).

Note 14: Receivables (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Social Benefit Receivables

   
Gross social benefit receivables 1,050 982
Impairment of social benefit receivables (570) (521)
Total social benefit receivables 480 461

Impairment of Social Benefit Receivables

   
Opening balance 521 528
Impairment losses recognised during the year 60 45
Amounts written off as uncollectible (11) (52)
Impairment losses reversed - -
Closing balance 570 521
Collective impairment allowance 570 521
Individual impairment allowance - -
Impairment of Social Benefit Receivables 570 521

Ageing of Social Benefit Receivables Past Due But Not Impaired

   
Less than six months - -
Between six months and one year - -
Greater than one year 101 100
Total social benefit receivables past due but not impaired 101 100

Social benefit receivables comprise benefit overpayments, advances on benefits and recoverable special needs grants primarily administered by the Ministry of Social Development with a carrying value of $466 million (2010: $450 million). The recoverable amount of social benefit receivables is determined by discounting the expected future cash flows (net of estimated service costs).

Their carrying amount provides a reasonable approximation of their fair value.

Note 14: Receivables (continued)
  30 June
2011
$m
30 June
2010
$m

Recoveries from receiverships

   
Opening balance of recoveries expected from receiverships 13 -
Recoveries expected from entities defaulting during the year 1,104 -
Revision of expected recoveries (236) -
Payments received from receivers (142) -
Closing balance 739 -
Total payments to depositors under the Guarantee scheme 1,897 43

As a consequence of payments made to depositors of failed finance companies under the deposit guarantee scheme, the Crown has inherited the beneficial interest in the proceeds that can be recovered from the secured assets of the receiverships. The reported receivables represent the receivers’ best prudent estimates of likely recoveries from the receiverships. However the eventual return to the Crown is dependent upon the value that can be realised from these entities’ assets and the timing of receipts. A range of outcomes for eventual recoveries is possible. The Crown monitors the receiverships to obtain assurance that optimal proceeds are realised as soon as possible. In the 2010 financial statements the recoveries from receiverships were disclosed as part of the provision for the deposit guarantee scheme (refer note 27).

Note 14: Receivables (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Trade and Other Receivables

   
Gross trade and other receivables 10,009 3,064
Impairment of trade and other receivables (82) (65)
Total trade and other receivables 9,927 2,999

Impairment of Trade and Other Receivables

   
Opening balance 65 43
Impairment losses recognised during the year 33 26
Amounts written off as uncollectible (15) (3)
Impairment losses reversed (1) (1)
Closing balance 82 65
Collective impairment allowance 68 54
Individual impairment allowance 14 11
Impairment of Trade and Other Receivables 82 65

Ageing of Trade and Other Receivables Past Due But Not Impaired

   
Less than six months 175 136
Between six months and one year 9 14
Greater than one year 5 3
Total trade and other receivables past due but not impaired 189 153

Trade and other receivables include $5,381 million relating to AMI and EQC relating to reinsurance receivables. The rest of the trade and other receivables are short term, with $4,310 million (2010: $2,776 million) expected to be settled in the next year. Their carrying amount provides a reasonable approximation of their fair value.

Note 15: Marketable securities, deposits and derivatives in gain

Note 15: Marketable securities, deposits and derivatives in gain
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
39,663 41,485 Marketable securities 39,214 35,732
2,240 2,161 Long term deposits 2,259 2,784
1,771 3,053 Derivatives in gain 5,415 2,972
2,546 2,307 IMF financial assets 2,168 2,199
46,220 49,006 Total marketable securities, deposits and derivatives in gain 49,056 43,687
   

By maturity

   
36,443 38,131 Expected to be realised within one year 36,448 32,446
9,777 10,875 Expected to be held for more than one year 12,608 11,241
46,220 49,006 Total marketable securities, deposits and derivatives in gain 49,056 43,687
   

By source

   
36,998 39,236 Core Crown 39,686 35,376
14,333 15,744 Crown entities 16,939 14,091
3,093 3,188 State-owned enterprises 2,651 2,566
(8,204) (9,162) Inter-segment eliminations (10,220) (8,346)
46,220 49,006 Total marketable securities, deposits and derivatives in gain 49,056 43,687

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

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

Note 16: Share Investments

Note 16: Share Investments
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By maturity

   
11,936 8,660 Expected to be realised within one year 8,284 7,451
5,835 5,546 Expected to be held for more than one year 5,964 4,728
17,771 14,206 Total share investments 14,248 12,179
   

By source

   
9,948 7,101 Core Crown 6,879 5,768
7,786 7,088 Crown entities 7,198 6,392
65 57 State-owned enterprises 207 60
(28) (40) Inter-segment eliminations (36) (41)
17,771 14,206 Total share investments 14,248 12,179

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 inception date.

Note 17: Advances

 
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
7,300 7,325 Student loans 7,460 6,790
12,411 11,255 Kiwibank mortgages 11,495 10,419
700 1,271 Other advances 1,612 1,238
20,411 19,851 Total advances 20,567 18,447
   

By source

   
11,543 12,267 Core Crown 12,447 11,088
364 368 Crown entities 368 416
12,762 11,720 State-owned enterprises 12,382 11,114
(4,258) (4,504) Inter-segment eliminations (4,630) (4,171)
20,411 19,851 Total advances 20,567 18,447
   

Student Loans

   
12,050 12,024 Nominal value 12,070 11,145
(4,750) (4,699) Write-down on initial recognition and impairment (4,610) (4,355)
7,300 7,325 Total student loans 7,460 6,790
    Gross carrying value 8,697 8,152
    Impairment of student loans (1,237) (1,362)
    Total student loans 7,460 6,790
   

By maturity

   
    Expected to be repaid within one year 787 759
    Expected to be outstanding for more than one year 6,673 6,031
    Total student loans 7,460 6,790
   

Movement During the Year

   
6,874 6,790 Opening balance 6,790 6,553
1,616 1,579 Amount lent in the current year 1,564 1,525
(772) (707) Less initial write-down to fair value (713) (728)
(826) (786) Repayments made during the year (802) (754)
506 501 Interest unwind 484 463
(110) (64) Impairment losses (recognised)/reversed during the year 125 (280)
12 12 Other movements 12 11
7,300 7,325 Closing balance student loans 7,460 6,790
   

Impairment of Student Loans

   
    Opening balance 1,362 1,082
    Impairment losses recognised during the year (125) 280
    Amounts written off as uncollectible - -
    Impairment losses reversed - -
    Closing balance 1,237 1,362

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

 
  Actual
  30 June 2011
$m
30 June 2010
$m
Significant assumptions behind the carrying value are:    
Effective interest rate - current year 8.1% 9.5%
Effective interest rate - weighted average 7.1% 7.0%
Interest rate applied to loans for overseas borrowers 6.6%-6.7% 6.6%-6.8%
CPI 2.5%-2.8% 2.4%-3.0%
Future salary inflation 3.5%-3.8% 3.0%-3.5%

In contrast with the amortised cost approach described above, fair value is the amount for which the loans could be exchanged between knowledgeable, willing parties in an arm's-length transaction as at 30 June 2011. It is determined by discounting the cash flows at an appropriate discount rate.

 
  Actual
  30 June 2011
$m
30 June 2010
$m
Fair value of the student loan portfolio 7,221 6,366
Impact on fair value of a 1% increase in discount rate (416) (361)
Impact on fair value of a 1% decrease in discount rate 475 412

The fair value differs from the carrying value due to changes in market interest rates at reporting date. The carrying value is not adjusted for such changes as it is valued using the effective interest rate determined when the loan was initially drawn. However, the fair value was calculated on a discount rate that was current at 30 June 2011. At that date the fair value was calculated on a discount rate of 7.6% (2010: 7.7%) whereas a weighted average effective interest rate of 7.1% was used for the carrying value. Therefore the lower fair value does not represent an impairment of the asset.

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

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

Note 17: Advances (continued)

Note 17: Advances (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Kiwibank Mortgages

   
   

By maturity

   
993 1,045 Expected to be repaid within one year 1,028 908
11,418 10,210 Expected to be outstanding for more than one year 10,467 9,511
12,411 11,255 Total Kiwibank mortgages 11,495 10,419
   

Impairment of Kiwibank Mortgages

   
    Opening balance 20 12
    Impairment losses recognised on mortgages 56 8
    Amounts written off as uncollectible 12 -
    Impairment losses reversed (1) -
    Closing balance 87 20
    Collective impairment allowance 37 10
    Individual impairment allowance 50 10
    Impairment of Kiwibank Mortgages 87 20
   

Ageing of Kiwibank Mortgages Past Due But Not Impaired

   
    Less than six months 185 218
    Between six months and one year - -
    Greater than one year - -
    Total Kiwibank mortgages past due but not impaired 185 218
    Fair value of collateral held 166 207
   

Measurement Basis for Kiwibank Mortgages

   
    Kiwibank mortgages measured at amortised cost 11,047 9,183
    Kiwibank mortgages measured at fair value 448 1,236
    Total Kiwibank mortgages 11,495 10,419

Kiwibank mortgages originating since 1 January 2008 are measured at amortised cost as these mortgages are generally managed on a held-to-maturity basis. Retail fixed rate lending issued prior to 1 January 2008 has been designated at fair value through the profit and loss, as this significantly reduces an accounting mismatch, which would arise if such loans were carried at amortised cost, and the derivatives, which have been entered into to offset the interest rate risk on the retail fixed loans are held for trading. Movements in fair value are reported in the statement of financial performance.

The fair value of Kiwibank mortgages measured at amortised cost is $11,107 million (2010: $9,218 million). This valuation 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 mortgages is the carrying value reported in the statement of financial position. Collateral is obtained to mitigate any risk of loss, which in the case of Kiwibank mortgages are primarily in the form of properties.

Note 17: Advances (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Other Advances

   
   

By maturity

   
70 235 Expected to be repaid within one year 763 269
630 1,036 Expected to be outstanding for more than one year 849 969
700 1,271 Total other advances 1,612 1,238
   

Impairment of Other Advances

   
    Opening balance 84 102
    Impairment losses recognised during the year 141 67
    Amounts written off as uncollectible (33) (78)
    Impairment losses reversed (2) (7)
    Closing balance 190 84
    Collective impairment allowance 134 73
    Individual impairment allowance 56 11
    Impairment of Other Advances 190 84
   

Ageing of Other Advances Past Due But Not Impaired

   
    Less than six months - 14
    Between six months and one year - -
    Greater than one year - -
    Total other advances past due but not impaired - 14
   

Measurement Basis for Other Advances

   
680 1,024 Other advances measured at amortised cost 1,367 1,011
20 247 Other advances measured at fair value 245 227
700 1,271 Total other advances 1,612 1,238

The NZS Fund, Public Trust and a number of SOE's manage the majority of these advances.

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

Their carrying amount provides a reasonable approximation of their fair value.

Note 18: Inventory

Note 18: Inventory
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
    Inventories held for sale 100 93
    Military inventories 317 287
    Other consumables 891 780
1,228 1,309 Total inventory 1,308 1,160
   

By maturity

   
1,035 1,083 Expected to be sold or consumed within one year 1,112 959
193 226 Expected to be sold or consumed after one year 196 201
1,228 1,309 Total inventory 1,308 1,160
   

By source

   
472 450 Core Crown 450 422
178 193 Crown entities 180 177
578 666 State-owned enterprises 678 561
- - Inter-segment eliminations - -
1,228 1,309 Total inventory 1,308 1,160

Note 19: Other Assets

Note 19: Other Assets
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
354 415 Prepayments 467 428
56 65 Investment property 56 71
664 704 Agricultural assets 759 664
315 379 Investment in supranational organisations 360 302
99 105 Other 354 196
1,488 1,668 Total other assets 1,996 1,661
   

By maturity

   
488 543 Expected to be realised within one year 859 642
1,000 1,125 Expected to be held for more than one year 1,137 1,019
1,488 1,668 Total other assets 1,996 1,661
   

By source

   
963 1,125 Core Crown 1,241 1,041
123 152 Crown entities 199 149
431 420 State-owned enterprises 611 509
(29) (29) Inter-segment eliminations (55) (38)
1,488 1,668 Total other assets 1,996 1,661

Note 20: Property, Plant and Equipment

Note 20: Property, Plant and Equipment
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Net Carrying Value

   
   

By class of asset

   
16,570 16,803 Land (valuation) 16,372 16,688
25,831 24,822 Buildings (valuation) 24,539 24,019
2,887 2,812 Electricity distribution network (cost) 2,690 2,251
12,333 13,953 Electricity generation assets (valuation) 14,439 13,642
2,347 2,083 Aircraft (excluding military) (valuation) 1,805 1,731
25,596 25,838 State highways (valuation) 25,126 24,838
13,224 12,554 Rail network (valuation) 12,749 12,437
3,835 3,382 Specialist military equipment (valuation) 3,331 3,413
8,645 8,522 Specified cultural and heritage assets (valuation) 8,133 8,505
6,474 6,164 Other plant and equipment (cost) 5,670 5,806
117,742 116,933 Total property, plant and equipment 114,854 113,330
   

By source

   
31,877 30,334 Core Crown 29,549 29,986
49,453 49,722 Crown entities 48,480 48,109
36,412 36,877 State-owned enterprises 36,825 35,235
- - Inter-segment eliminations - -
117,742 116,933 Total property, plant and equipment 114,854 113,330
   

By holding

   
1,639 1,121 Leasehold 1,316 1,166
116,103 115,812 Freehold 113,538 112,164
117,742 116,933 Total property, plant and equipment 114,854 113,330
    Property, plant and equipment pledged to secure borrowing 1,246 1,156

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

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

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Total Property, Plant and Equipment

   

Cost or Valuation

   
Opening balance 123,941 119,547
Additions 6,558 6,274
Acquisitions through business combinations 86 281
Disposals (1,283) (977)
Net revaluations (2,471) (1,143)
Net foreign currency exchange differences (9) (19)
Other (221) (22)
Total cost or valuation 126,601 123,941

Accumulated Depreciation and Impairment

   
Opening balance 10,611 9,412
Eliminated on disposal (832) (587)
Eliminated on revaluation (1,884) (1,349)
Impairment losses charged to operating balance 30 4
Reversals of impairment losses charged to operating balance (21) (465)
Depreciation expense 3,727 3,582
Net foreign currency exchange differences 1 (12)
Other 115 26
Total accumulated depreciation and impairment 11,747 10,611
Total property, plant and equipment 114,854 113,330
Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Land (valuation)

   
Opening balance 16,688 16,289
Additions 180 224
Acquisitions through business combinations - 4
Disposals (148) (135)
Net revaluations (376) 302
Other 28 4
Carrying value of land 16,372 16,688

By holding

   
Leasehold - -
Freehold 16,372 16,688
Carrying value of land 16,372 16,688

The value of the land underneath state highways and the rail network, as well as land set aside for cultural and heritage purposes (i.e. national parks, forest parks, conservation areas and recreational facilities) is included as a component of the value of those separate classes of assets.

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Buildings (valuation)

   
Opening balance 26,051 25,184
Additions 1,537 1,819
Acquisitions through business combinations 33 19
Disposals (157) (306)
Net revaluations (702) (564)
Net foreign currency exchange differences (8) (13)
Other (102) (88)
Total buildings (valuation) 26,652 26,051

Accumulated Depreciation and Impairment on Buildings

   
Opening balance 2,032 1,465
Eliminated on disposal (118) (22)
Eliminated on revaluation (902) 36
Impairment losses charged to operating balance 3 1
Reversals of impairment losses charged to operating balance 6 (462)
Depreciation expense 1,080 1,073
Net foreign currency exchange differences - (12)
Other 12 (47)
Accumulated depreciation and impairment on buildings 2,113 2,032
Carrying value of buildings 24,539 24,019

By holding

   
Leasehold 216 253
Freehold 24,323 23,766
Carrying value of buildings 24,539 24,019

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

Note 20: Property, Plant and Equipment (continued)

Valuation details for land and buildings with a carrying value over $500 million are as follows:

Note 20: Property, Plant and Equipment (continued)
Category Valuer/Reviewer Approach Timing Carrying value
($m)
Housing stock Quotable Value NZ Limited Valuations based on market evidence or adjusted current rating valuations. Annual valuation cycle.  Latest valuation completed as at 30 June 2011.

14,998

(2010: 15,165)

School property Darroch Limited or experienced ministry staff (reviewed by Darroch) Valuations based on market evidence where possible, or depreciated replacement cost. Annual valuation cycle. Latest valuation completed as at 30 June 2011.

10,170

(2010: 10,048)

Corrections Land and Buildings Darroch Limited The latest full valuation was based on market evidence, except for prison buildings, which were valued at optimised depreciated replacement cost. Two-year valuation cycle. Latest full valuation completed as at 30 June 2011.

2,070

(2010: 1,978)

NZ Defence Force Land and Buildings Darroch Limited Valuations were based on market evidence or rating valuations. Five-year valuation cycle. Latest full valuation completed as at 30 June 2010.

1,851

(2010: 1,819)

Landcorp land and buildings on owned land (excluding protected land and buildings on leased land) Quotable Value NZ Limited Valuations based on market evidence where possible.  Buildings on leased land and protected land is not revalued. Annual valuation cycle. Latest valuation completed as at 30 June 2011.

1,176

(2010: 997)

Auckland District Health Board land and Buildings Telfer Young The latest full valuation for land was based on market evidence, while buildings were valued at optimised depreciated replacement cost. Annual valuation cycle.  Latest full valuation completed as at 30 June 2011.

754

(2010: 790)

New Zealand Police Land and Buildings Experienced staff undertake the property valuation in-house, using Beca Valuations Ltd as an expert adviser. Valuations based on market evidence where possible, or depreciated replacement cost. Three-year valuation cycle. Latest full valuation performed as at 30 June 2009.

727

(2010: 746)

Ministry of Justice Land and Buildings Beca Valuations Ltd Valuations based on market evidence where possible. Annual valuation cycles with physical inspections every three years. The latest full physical inspection was as at 30 June 2009.

584

(2010: 583)

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Electricity Distribution Network (cost)

   
Opening balance 2,993 2,677
Additions 484 320
Disposals (7) (3)
Other 77 (1)
Total electricity distribution network (cost) 3,547 2,993

Accumulated Depreciation and Impairment on Electricity Distribution Network

   
Opening balance 742 631
Eliminated on disposal (32) (30)
Depreciation expense 147 140
Other - 1
Accumulated depreciation and impairment on electricity distribution network 857 742
Carrying value of electricity distribution network 2,690 2,251

By holding

   
Leasehold - -
Freehold 2,690 2,251
Carrying value of electricity distribution network 2,690 2,251
Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Electricity Generation Assets (valuation)

   
Opening balance 13,816 12,079
Additions 366 406
Acquisitions through business combinations - 236
Disposals (6) (9)
Net revaluations 633 993
Net foreign currency exchange differences 7 -
Other (361) 111
Total electricity generation assets 14,455 13,816

Accumulated Depreciation and Impairment on Electricity Generation Assets

   
Opening balance 174 415
Eliminated on disposal (9) (8)
Eliminated on revaluation (414) (589)
Depreciation expense 374 356
Other (109) -
Accumulated depreciation and impairment on electricity generation assets 16 174
Carrying value of electricity generation assets 14,439 13,642

By holding

   
Leasehold 2 2
Freehold 14,437 13,640
Carrying value of electricity generation assets 14,439 13,642

Independent valuations of the Government's electricity generation assets have been performed as detailed below:

Note 20: Property, Plant and Equipment (continued)
Entity Valuer/Reviewer Approach Timing Carrying value
($m)
Meridian Energy Limited Pricewaterhouse Coopers Valuations of generation structures and plant are based on both the capitalisation of earnings methodology, applied to Meridian as a whole, and the discounted cash flow methodology. Regular revaluations not to exceed five years. Latest valuation completed as at 30 June 2011.

7,558

(2010: 8,031)

Mighty River Power Limited Pricewaterhouse Coopers Valuations based on net present value of future earnings of the assets on an existing use basis, excluding disposal and restoration costs. Regular revaluations not to exceed five years. All generation assets were last valued as at 30 June 2011.

4,418

(2010: 4,061)

Genesis Power Limited Internal valuation performed by management which was independently reviewed by Pricewaterhouse Coopers. The valuation was based on the present value of future cash flows associated with the assets on an existing use basis. Regular revaluations not to exceed five years. Latest valuation completed as at 30 June 2011.

2,603

(2010: 1,479)

Note 20: Property, Plant and Equipment (continued)

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Aircraft (excluding military) (valuation)

   
Opening balance 1,743 1,957
Additions 671 126
Disposals (16) (11)
Net revaluations (578) (312)
Other 1 (17)
Total aircraft (excluding military) 1,821 1,743

Accumulated Depreciation and Impairment on Aircraft

   
Opening balance 12 5
Eliminated on disposal (6) (5)
Eliminated on revaluation (161) (147)
Impairment losses charged to operating balance - 1
Reversals of impairment losses charged to operating balance - (1)
Depreciation expense 171 173
Other - (14)
Accumulated depreciation and impairment on aircraft 16 12
Carrying value of aircraft (excluding military) 1,805 1,731

By holding

   
Leasehold 1,040 812
Freehold 765 919
Carrying value of aircraft (excluding military) 1,805 1,731

Aircraft and related assets are valued annually. Independent valuations as at 30 June 2011 have been obtained from The Aircraft Value Analysis Company and Ascend Worldwide Limited to ascertain indicative market values of each aircraft on a stand-alone basis. The carrying value of the aircraft is recorded at an average of the valuations provided by the two valuers.

Related assets include spare engines and flight simulators.

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

State Highways (valuation)

   
Opening balance 24,838 24,067
Additions 1,351 1,289
Disposals (28) (43)
Net revaluations (1,050) (470)
Other 15 (5)
Total state highways 25,126 24,838

Accumulated Depreciation and Impairment on State Highways

   
Opening balance - -
Eliminated on revaluation (408) (403)
Depreciation expense 408 403
Accumulated depreciation and impairment on state highways - -
Carrying value of state highways 25,126 24,838

By holding

   
Leasehold - -
Freehold 25,126 24,838
Carrying value of state highways 25,126 24,838

State highways comprise the land, formation works, road structure, drainage works and traffic facilities of the roads, bridges, culverts, tunnels, stock and pedestrian underpasses, protection works and retaining structures. The state highways valuation is performed by an independent valuer, Opus International Consultants Limited with property valuations supplied by Darroch Limited. All 14 state highway regions were subject to a full revaluation in 2008/09. A cyclical basis is now being used so that each region is revalued at an interval not exceeding 3.5 years. Those regions that are not subject to a full revaluation in a particular year will be subject to a valuation update through the use of price indices.

State highways are valued at depreciated replacement cost based on the estimated present cost of constructing the existing assets by the most appropriate method of construction, reduced by factors for the age and condition of the asset. State highway corridor land, is included as part of the state highway, and is valued using an opportunity cost based on adjacent use, as an approximation to fair value.

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Rail Network (valuation)

   
Opening balance 12,635 12,520
Additions 577 462
Disposals (55) -
Net revaluations - (347)
Total rail network 13,157 12,635

Accumulated Depreciation and Impairment on Rail Network

   
Opening balance 198 14
Eliminated on disposal 11 -
Eliminated on revaluation - (24)
Reversals of impairment losses charged to operating balance (12) -
Depreciation expense 210 208
Other 1 -
Accumulated depreciation and impairment on rail network 408 198
Carrying value of rail network 12,749 12,437

By holding

   
Leasehold - -
Freehold 12,749 12,437
Carrying value of rail network 12,749 12,437

The rail network assets comprise land, buildings, and rail infrastructure assets (bridges, tunnels, tracks, level crossings, signals and electrification). The assets are recorded at their fair value at the date of the last revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Valuations are undertaken in accordance with the standards issued by the New Zealand Property Institute. Land and buildings were valued at 30 June 2010 by Darroch Limited. The last valuation of rail infrastructure assets was as at 30 June 2009 and was conducted by DTZ New Zealand Limited.

Railway infrastructure assets and specialised land and buildings are valued using optimised depreciated replacement cost. Non-specialised land and buildings which could be sold with relative ease are valued at market value. Land associated with the rail corridor is valued using an opportunity cost based on adjacent use, as an approximation to fair value.

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Specialist Military Equipment (valuation)

   
Opening balance 3,889 4,394
Additions 198 176
Disposals (42) (23)
Net revaluations 6 (658)
Other (13) -
Total specialist military equipment 4,038 3,889

Accumulated Depreciation and Impairment on Specialist Military Equipment

   
Opening balance 476 467
Eliminated on disposal (42) (31)
Eliminated on revaluation 1 (245)
Depreciation expense 272 286
Other - (1)
Accumulated depreciation and impairment on specialist military equipment 707 476
Carrying value of specialist military equipment 3,331 3,413

By holding

   
Leasehold - -
Freehold 3,331 3,413
Carrying value of specialist military equipment 3,331 3,413

Valuations use a market based approach, except where reliable market evidence is unavailable and then optimised depreciated replacement cost is used to calculate fair value.

The internally assessed valuation for specialist military equipment was performed at 30 June 2010 and was reviewed by an independent registered valuer (Beca Valuations Limited).

Note 20: Property, Plant and Equipment (continued)

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June
2011
$m
30 June
2010
$m

Specified Cultural and Heritage Assets (valuation)

   
Opening balance 8,872 8,957
Additions 64 75
Disposals (19) (12)
Net revaluations (405) (87)
Other 1 (61)
Total specified cultural and heritage assets 8,513 8,872

Accumulated Depreciation and Impairment on Specified Cultural and Heritage Assets

   
Opening balance 367 375
Eliminated on disposal (6) (48)
Eliminated on revaluation - 23
Reversals of impairment losses charged to operating balance (22) -
Depreciation expense 19 17
Other 22 -
Accumulated depreciation and impairment on specified cultural and heritage assets 380 367
Carrying value of specified cultural and heritage assets 8,133 8,505

By holding

   
Leasehold - -
Freehold 8,133 8,505
Carrying value of specified cultural and heritage assets 8,133 8,505

By group

   
National Archives 440 522
National Library 844 984
Conservation property 6,021 6,240
Parliamentary Library 29 29
Te Papa 776 725
Other 23 5
Carrying value of specified cultural and heritage assets 8,133 8,505

There are difficulties associated with obtaining an objective valuation for the specified cultural and heritage assets of the Government. These are discussed below:

National Archives Holdings

Archives in the possession of the Department of Internal Affairs (previously held by Archives New Zealand) have been valued and recorded at a best estimate of fair value as at 30 June 2011. Non exceptional items are revalued every three years and were last revalued in June 2011 using a methodology that divided the collection into categories by format and age, to associate records that could be said to have a broad commonality of value. Benchmark valuations were obtained from an independent valuer, Dunbar Sloane, through market assessments and from other collections of a similar nature to Government archives. Accessions since the date of valuation are valued on the basis of these benchmarks.

The value of the Treaty of Waitangi was based on a valuation as at 30 June 2011, supported by Sotheby's, an independent valuer. Other items of exceptional value were based on a valuation from Dunbar Sloane, also obtained in June 2011. These valuations were based on market assessments and comparisons with other items of a similar nature.

The Protected New Zealand Objects Act 1975 requires protected records to be kept in safe custody in accordance with the directions of the Minister for Arts, Culture and Heritage. Also, the Public Records Act 2005 establishes a recordkeeping framework, focusing on supporting good recordkeeping in Government.

National Library collections

The Heritage Collections are valued at fair value with valuations performed every three years. The latest valuation was performed by National Library staff as at 30 June 2011. The carrying value includes the value of purchases for the collections since the last revaluation and the value of material received through donation and legal deposit.

Section 11 of the National Library of New Zealand (Te Puna Mātauranga o Aotearoa) Act 2003 requires the Crown to own the collections of the Alexander Turnbull Library in perpetuity. The Heritage Collections are not depreciated.

Conservation Property

Conservation property includes the Conservation Estate land (national parks, forest parks, conservation areas) and recreational facilities. The Conservation Estate land is initially recognised at cost and is revalued based on rateable valuations supplied by PropertyIQ. Land not matched to a rateable valuation is assessed using an average per hectare rate. Land values were independently confirmed as appropriate by Crightonstone Limited.

The Department of Conservation recreational facilities were recorded at their fair value.

The use and disposal of all the Crown land managed by the Department of Conservation is determined by legislation, in particular the Reserves Act 1977, the National Parks Act 1980 and the Conservation Act 1987. The Crown land managed by the Department is not subject to mortgages or other charges. Specific areas may, however, be included in the Treaty settlements if the Crown decides to offer those areas to claimants. Some areas may be subject to leases, licences or permits issued by the Department under concession provisions of the relevant legislation.

Parliamentary Library

The Library Heritage collection is valued at current market value on an annual basis by the Service's library staff in accordance with guidelines released by the New Zealand Library Association and the National Library of New Zealand.

Library Reference Collections are measured at historic cost.

Te Papa's collections

Te Papa's collections have been valued at cost or market value, with the exception of the Natural Environment collections, which are shown at replacement cost. Collections are valued annually, with each class of collection valued at least once every three years. Acquisitions to collections between revaluations are recorded at cost. As the collections tend to have an indefinite life and are generally not of a depreciable nature, depreciation is not applicable.

The valuation for the Library, History and Photographic collections was undertaken by Webb's (Auckland) as independent valuers in 2011.

The valuation of the Botanical, Vertebrate and Invertebrate Collections was conducted by a Te Papa-developed in house model based on current replacement costs. The model was independently validated by Simon Storey, of Simon Storey Valuers, Sydney, an accredited valuer of similar collections for the Australian Government.

Crown Research Institutes “collection type” asset values

The Crown, when establishing Crown Research Institutes in 1992, transferred various national databases and reference collections to individual Institutes at nil value. No reliable valuation is able to be obtained for these assets, and so they remain at nil value. Many of the databases and collections were specifically identified by the Foundation for Research, Science and Technology (now part of the Ministry of Science and Innovation) as being of significant importance and as such have covenants attached to them restricting an Institute's ability to deal with them.

Note 20: Property, Plant and Equipment (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Other Plant and Equipment (cost)

   
Opening balance 12,416 11,423
Additions 1,130 1,377
Acquisitions through business combinations 53 22
Disposals (805) (435)
Net revaluations 1 -
Net foreign currency exchange differences (8) (6)
Other 133 35
Total other plant and equipment 12,920 12,416

Accumulated Depreciation and Impairment on Other Plant and Equipment

   
Opening balance 6,610 6,040
Eliminated on disposal (630) (443)
Impairment losses charged to operating balance 27 2
Reversals of impairment losses charged to operating balance 7 (2)
Depreciation expense 1,046 926
Net foreign currency exchange differences 1 -
Other 189 87
Accumulated depreciation and impairment on other plant and equipment 7,250 6,610
Carrying value of other plant and equipment 5,670 5,806

By holding

   
Leasehold 58 99
Freehold 5,612 5,707
Carrying value of other plant and equipment 5,670 5,806

Note 21: Equity Accounted Investments

Note 21: Equity Accounted Investments
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
7,558 7,972 Tertiary Education Institutions 7,968 7,740
1,882 1,426 Other 1,333 1,309
9,440 9,398 Total equity accounted investments 9,301 9,049

Tertiary Education Institutions (TEIs)

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

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

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

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

Note 21: Equity Accounted Investments (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Operating Results

   
2,208 2,239 Revenue from Crown 2,200 2,232
1,982 1,972 Other revenue 2,217 1,968
(4,138) (4,002) Expenses (4,249) (3,992)
52 209 Net surplus 168 208
   

Net worth

   
   

Assets

   
1,275 1,435 Financial assets 1,450 1,435
7,431 7,864 Property, plant and equipment 7,867 7,638
328 291 Other assets 322 285
9,034 9,590 Total assets 9,639 9,358
   

Liabilities

   
230 242 Borrowings 228 242
1,246 1,376 Other liabilities 1,443 1,376
1,476 1,618 Total liabilities 1,671 1,618
7,558 7,972 Net worth 7,968 7,740

Note 22: Intangible Assets and Goodwill

Note 22: Intangible Assets and Goodwill
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
    Computer software 1,266 1,260
    Net Kyoto position 291 212
    Goodwill 485 487
    Other intangible assets 352 225
2,596 2,524 Total intangible assets and goodwill 2,394 2,184
   

By maturity

   
    Expected to be sold or consumed within one year 398 363
    Expected to be sold or consumed after one year 1,996 1,821
    Total intangible assets and goodwill 2,394 2,184
   

By source

   
1,327 1,375 Core Crown 1,157 1,122
503 444 Crown entities 430 417
766 705 State-owned enterprises 807 645
- - Inter-segment eliminations - -
2,596 2,524 Total intangible assets and goodwill 2,394 2,184
Note 22: Intangible Assets and Goodwill (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Computer Software

   

Internally-Generated Computer Software

   

Cost

   
Opening balance 2,148 1,934
Additions 225 202
Disposals (121) (29)
Other movements 80 41
Total cost 2,332 2,148

Accumulated Amortisation

   
Opening balance 1,393 1,173
Eliminated on disposal (102) (19)
Impairment losses charged to operating balance 4 5
Reversals of impairment losses charged to operating balance - 29
Amortisation 235 222
Other movements 21 (17)
Total accumulated amortisation 1,551 1,393
Carrying value of internally-generated computer software 781 755

Purchased Computer Software

   

Cost

   
Opening balance 1,526 1,315
Additions 178 271
Disposals (202) (32)
Other movements 1 (28)
Total cost 1,503 1,526

Accumulated Amortisation

   
Opening balance 1,021 899
Eliminated on disposal (172) (23)
Impairment losses charged to operating balance (2) 18
Reversals of impairment losses charged to operating balance - (29)
Amortisation 163 141
Other movements 8 15
Total accumulated amortisation 1,018 1,021
Carrying value of purchased computer software 485 505
Total computer software 1,266 1,260
Note 22: Intangible Assets and Goodwill (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Net Kyoto Position

   
Opening net asset/(provision) 212 207
Change in the price of carbon and foreign exchange rate (123) (30)
Change in net projected emission units 202 35
Closing net asset 291 212
Note 22: Intangible Assets and Goodwill (continued)
  30 June 2011 30 June 2010
  Emission Units
million tonnes
(Mt)
Emission Units
million tonnes
(Mt)

Net Kyoto Position

   
Kyoto target (assigned amount units) 309.6 309.6
Less AAUs allocated to emission reducing projects 3.4 5.0
Total commitment target 306.2 304.6

Projected emission units

   
Agriculture 170.1 177.6
Energy (incl. transport) and industrial processes 183.6 184.9
Waste 9.9 8.2
Solvent and other product use 0.1 0.2
Total projected emission units 363.7 370.9
Removals via forest 89.3 89.1
Deforestation emissions (6.6) (9.2)
Less net removals via forests 82.7 79.9
Net projected emission units 281.0 291.0
Less net transfers of AAUs 3.4 2.4
Surplus units 21.8 11.2

The New Zealand Government has committed under the Kyoto Protocol to ensuring that New Zealand's average net emissions of greenhouse gases over 2008-2012 (the first commitment period of the Kyoto Protocol or CP1) is reduced to 1990 levels or to take responsibility for the difference. New Zealand can meet its commitment through emissions reductions and use of the Kyoto Protocol flexibility mechanisms such as Joint Implementation, the Clean Development Mechanism, and offsetting increased emissions with carbon removed by forests. New Zealand's Kyoto Protocol compliance over the first commitment period will not be finalised until 2015 when the annual submission covering the period 1990 to 2012 is submitted and internationally reviewed. These financial statements report on the New Zealand Government's obligations for the first commitment period, but not for future commitment periods which are currently being negotiated.

New Zealand's net Kyoto position as at 30 June 2011 of $NZ291 million (2010: $NZ212 million) is based on the projected surplus of 21.8million Kyoto Protocol emission units and a carbon price of €7.63 per unit. The carbon price in New Zealand dollars equates to $NZ13.31 (2010: $NZ18.94), using the 30 June 2011 exchange rate of €0.5734 =$NZ1 (30 June 2010: €0.5677 = $NZ1, and a carbon price of €10.75 per unit).

The carbon price has been determined by the Ministry for the Environment based on a report commissioned from Point Carbon on the international market transactions that have occurred in the AAU markets.

Note 22: Intangible Assets and Goodwill (continued)

Net Kyoto Position (continued)

The projected balance of Kyoto Protocol units (the net position) is compiled by the Ministry for the Environment using sectoral projection reports from across government. This includes reports on agriculture emissions and net removals from eligible forests from the Ministry of Agriculture and Forestry; energy emissions (including transport) and industrial processes emissions from the Ministry of Economic Development, and emissions from the waste sector from the Ministry for the Environment. Details of the net position can be found on the Ministry for the Environment's website: www.mfe.govt.nz. The sectoral reports from other departments can also be found by following links on this website. The projections use the latest information from the national inventory of greenhouse gas emissions and removals submitted to the United Nations Framework Convention on Climate Change secretariat on 15 April 2011.

No liability for periods beyond 2012 has been recognised, as New Zealand currently has no specific obligations beyond the first commitment period. However, a view about the outcome of negotiations for future periods is intrinsic to the market price for carbon that has been used to measure the position.

Beyond 2012, the financial impact of New Zealand's climate change response will depend on the global stabilisation goal, the global cap/emission reducing strategy, the rules regarding which activities can be used to achieve emission reductions and the target that New Zealand signs up to.

Within New Zealand, the Emissions Trading Scheme (ETS) will transfer a price of carbon through the economy. Determinations as to when sectors are covered under the ETS and how much free allocation is made to these sectors will therefore also impact the financial statements of government. Foresters opt-in to the ETS and are allocated units. Because units are allocated free-of-charge, the Crown incurs an expense. The outstanding balance of these units is reported as the provision for ETS credits in note 27 of these financial statements. When the forests are harvested, the foresters may use the units to meet their carbon obligations.

During the first commitment period, the Ministry for the Environment estimate that 89.3 million tonnes of credits will be generated by carbon removals via forests (2010: 89.1 million tonnes). Of this amount, 14.4 million tonnes has been allocated to foresters through the ETS as at 30 June 2011 (2010: 5.1 million tonnes). To the extent that these forests are harvested (in subsequent commitment periods), and a future international agreement is negotiated, there will be an associated liability generated that will need to be repaid. As the forestry credits have been incorporated when calculating the current position for the first commitment period, the associated obligation of the Crown in respect of future commitment periods has been reported as a separate contingent liability (refer note 32). Using the carbon price for measuring the net Kyoto position as at 30 June 2011, this contingent liability can be measured at $NZ997 million (ie, 74.9 million tonnes x $NZ13.31) (2010: $1,590 million).

The measurement of the Kyoto position is, by its nature, more uncertain than a number of other items in the statement of financial position. Fluctuations in the value of the estimate may occur through changes in the assumptions underlying the quantum, movements in the price of carbon, the exchange rate with the European currency unit, and government policy changes.

Note 22: Intangible Assets and Goodwill (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Goodwill

   

Cost

   
Opening balance 706 679
Additions 4 30
Disposals - (3)
Other movements (3) -
Total cost 707 706

Accumulated Impairment

   
Opening balance 219 218
Eliminated on disposal - -
Impairment losses charged to operating balance - 2
Reversals of impairment losses charged to operating balance - -
Amortisation charge 2 -
Other movements 1 (1)
Total accumulated impairment 222 219
Carrying value of goodwill 485 487

Goodwill in relation to Air New Zealand of $258 million (2010: $258 million) has been tested for impairment in June 2011 based on a value in use discounted cash flow valuation. Cash flow forecasts were prepared for five years using Air New Zealand board reviewed business plans. Key assumptions include exchange rates, jet fuel costs, passenger load factors and route yields. These assumptions have been based on historical data and current market information. The cash flow forecasts are particularly sensitive to fluctuations in fuel prices and exchange rates and are extrapolated using an average nominal growth rate of approximately 1.5%. The cash flow projections are discounted using post-tax discount rate scenarios of 10 - 10.5%. The 2011 valuation confirmed that there was no impairment to the goodwill asset required.

Note 23: Payables

Note 23: Payables
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
6,242 5,941 Accounts payable 7,337 6,703
3,759 3,228 Taxes repayable 3,762 3,228
10,001 9,169 Total payables 11,099 9,931
   

By maturity

   
9,649 8,892 Expected to be settled within one year 10,721 9,734
352 277 Expected to be outstanding for more than one year 378 197
10,001 9,169 Total payables 11,099 9,931
   

By source

   
7,011 6,160 Core Crown 6,997 7,120
3,680 4,747 Crown entities 5,587 4,390
4,876 4,842 State-owned enterprises 4,779 4,652
(5,566) (6,580) Inter-segment eliminations (6,264) (6,231)
10,001 9,169 Total payables 11,099 9,931

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

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

Note 24: Borrowings

Note 24: Borrowings
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
41,328 47,016 Government stock1 46,018 27,926
9,509 6,698 Treasury bills 7,028 7,625
337 270 Government retail stock 261 309
7,602 6,736 Settlement deposits with Reserve Bank 6,276 6,679
1,369 1,777 Derivatives in loss2 2,767 2,376
1,037 1,231 Finance lease liabilities 1,176 920
28,234 27,275 Other borrowings 26,719 23,898
89,416 91,003 Total borrowings3 90,245 69,733
   

By source

   
73,196 76,942 Core Crown 76,827 57,583
4,988 5,129 Crown entities 5,123 4,835
23,646 22,600 State-owned enterprises 23,099 19,747
(12,414) (13,668) Inter-segment eliminations (14,804) (12,432)
89,416 91,003 Total borrowings 90,245 69,733
   

By maturity

   
58,458 47,662 Expected to be settled within one year 33,384 30,246
30,958 43,341 Expected to be outstanding for more than one year 56,861 39,487
89,416 91,003 Total borrowings 90,245 69,733
   

By guarantee

   
65,890 68,536 Sovereign-guaranteed debt4 67,765 50,017
23,526 22,467 Non-sovereign debt 22,480 19,716
89,416 91,003 Total borrowings 90,245 69,733

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.

1. Government stock includes $395 million of infrastructure bonds (2010: $395 million).

2. Derivatives are included in either borrowings or marketable securities depending on their gain or loss position at balance date. This treatment leads to fluctuations in individual items primarily due to exchange rate movements.

3. Total borrowings are the total borrowings (both sovereign-guaranteed and non-sovereign guaranteed) of the total Crown. This equates to the amount in the total Crown statement of financial position and represents the complete picture of whole-of-Crown debt obligations to external parties.

4. Total borrowings can be split into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that borrowings by State-owned enterprises and Crown entities are not explicitly guaranteed by the Crown.

Government Stock

Note 24: Borrowings (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m
Government stock measured at amortised cost 42,971 26,814
Government stock measured at fair value 3,047 1,112
Total Government stock 46,018 27,926

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

The fair value of government stock measured at amortised cost is $47,244 million (2010: $27,836 million). This valuation is based on observable market prices.

The valuation of government stock reported at fair value is also based on observable market prices. There have been no changes in the Standard & Poor’s or Moody’s international credit ratings for New Zealand. Accordingly changes in fair value are due to factors other than Sovereign credit risk.

Note 24: Borrowings (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Government stock measured at fair value

   
Carrying value 3,047 1,112
Amount payable on maturity 324 904
Fair value impact from changes in credit risk for the year - -
Cumulative fair value impact from changes in credit risk - -

Treasury Bills

Treasury bills are reported at either amortised cost or fair value, with fair value based on observable market price. As these are short-term sovereign-issued instruments, the carrying value is not materially affected by changes in Sovereign credit risk and the carrying value approximates the amount payable at maturity.

Note 24: Borrowings (continued)

Settlement Deposits with Reserve Bank

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

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

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

Finance Lease Liabilities

Note 24: Borrowings (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By source

   
7 11 Core Crown 16 12
46 51 Crown entities 49 46
984 1,174 State-owned enterprises 1,115 866
- (5) Inter-segment eliminations (4) (4)
1,037 1,231 Total finance lease liabilities 1,176 920
   

Undiscounted Minimum Lease Payments

   
    No later than one year 136 110
    Later than one year and not later than five years 581 459
    Later than five years 596 516
    Total undiscounted minimum lease payments 1,313 1,085
   

Present Value of Minimum Lease Payments

   
    No later than one year 120 90
    Later than one year and not later than five years 518 392
    Later than five years 541 445
    Total present value of minimum lease payments 1,179 927
    Future finance charges 134 158

Finance leases relate to aircraft, electricity generation and transmission equipment and office equipment. The Government entities entering into finance leases generally have options to purchase the equipment for a nominal amount at the conclusion of the lease agreements. The Government's obligations under finance leases are secured by the lessors' title to the leased assets.

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

Other Borrowings

Note 24: Borrowings (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
16,951 15,727 Other borrowings measured at amortised cost 20,999 18,587
11,283 11,548 Other borrowings measured at fair value 5,720 5,311
28,234 27,275 Total other borrowings 26,719 23,898

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

The fair value of other borrowings measured at amortised cost is $20,688 million (2010: $18,571 million). The fair value of financial liabilities with standard terms and conditions traded on active liquid markets are determined by reference to quoted market prices. Where such prices are not available use is made of estimated discounted cash flows models with reference to market interest rates.

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

Of these borrowings, $7,179 million (2010: $6,414 million) is sovereign-issued debt administered by the Reserve Bank and NZDMO. As there have been no changes in the international credit rating for Sovereign debt there has been no value change attributable to credit risk for these borrowings.

The remaining borrowings of $19,530 million (2010: $17,484 million) comprise non-sovereign-issued debt of Crown entities and State-owned enterprises. The following table identifies the difference between the carrying amount and amount payable at maturity as well as the extent that fair value movements have resulted from changes in credit risk of the issuing entity. The carrying value can differ to the amount actually payable on maturity where the effect of discounting cash flows is material.

Note 24: Borrowings (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Other borrowings measured at fair value

   
Carrying value 5,720 5,311
Amount payable on maturity 6,424 5,011
Fair value impact from changes in credit risk for the year 121 (7)
Cumulative fair value impact from changes in credit risk (311) (191)

Note 25: Insurance Liabilities

Note 25: Insurance Liabilities
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By entity

   
28,483 26,761 ACC liability 26,939 26,997
86 4,985 EQC property damage liability 10,570 88
- - AMI insurance liability 2,082 -
66 56 Other insurance liabilities 59 46
- - Inter-segment eliminations (336) -
28,635 31,802 Total insurance liabilities 39,314 27,131
   

By component

   
    Outstanding claims liability 36,422 24,517
    Unearned premium liability 2,572 2,508
    Unearned premium liability deficiency 320 106
    Other - -
    Total insurance liabilities 39,314 27,131
   

By maturity

   
5,586 10,169 Expected to be settled within one year 8,880 4,919
23,049 21,633 Expected to be outstanding for more than one year 30,434 22,212
28,635 31,802 Total insurance liabilities 39,314 27,131
   

Assets arising from insurance obligations are:

   
    Receivables for premiums 3,101 3,230
    Reinsurance claim recoveries 5,381 -

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

The Crown acquired effective control of AMI on the 7th of April 2011 (refer note 34). As a result, the insurance obligations of AMI are not included in the 2010 comparatives.

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. ACC and EQC have not deferred any acquisition costs (eg, marketing costs) in respect of insurance obligations at the reporting date. AMI had deferred acquisition costs of $2.1 million at 30 June 2011.

Analysis of insurance liabilities

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

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

The unearned premium liability represents premiums received in advance of the insured period.

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

Analysis of ACC insurance liability

ACC's insurance obligations arise primarily from the accident compensation scheme provision of personal injury cover for all New Zealand citizens, residents and temporary visitors to New Zealand.

PricewaterhouseCoopers Actuarial Pty Limited have prepared the independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2011. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

Note 25: Insurance Liabilities (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

The ACC liability comprises:

   
ACC outstanding claims liability 24,510 24,430
ACC unearned premium liability 2,429 2,462
ACC unearned premium liability deficiency - 105
Total ACC liability 26,939 26,997

Analysis of Outstanding ACC Claims Liability

   
Undiscounted outstanding claims liability 74,895 69,768
Discount adjustment (53,174) (48,114)
Risk margin 2,789 2,776
Total outstanding ACC claims liability 24,510 24,430
Expected future claims payments - central estimate 20,374 20,342
Claims handling expenses 1,347 1,312
Outstanding claims liability before risk margin 21,721 21,654
Risk margin 2,789 2,776
Total outstanding ACC claims liability 24,510 24,430

Movement in Outstanding ACC Claims Liability

   
Opening balance 24,430 23,786
Claims incurred for the year 3,652 3,913
Claims paid out in the year (2,896) (3,175)
Discount rate unwind 832 708

Experience adjustments (actuarial gains and losses):

   
- actual and assumed claim experience (1,966) (1,661)
- change in discount rate 862 1,170
- change in inflation rate 108 49
- change in other economic assumptions - 32
Other movements (512) (392)
Closing outstanding ACC claims liability 24,510 24,430

Movement in ACC Unearned Premium Liability

   
Opening balance 2,462 2,095
Earning of premiums previously deferred (2,462) (2,095)
Deferral of premiums on current year contracts 2,429 2,462
Other - -
Closing ACC unearned premium liability 2,429 2,462

Note 25: Insurance Liabilities (continued)

Note 25: Insurance Liabilities (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Analysis of ACC unearned premium liability deficiency

   
Unearned premium liability 2,429 2,462
Adjusted for unearned premium relating to residual claims and premium liabilities without deficiency (2,429) (2,327)
Adjusted ACC unearned premium liability - 135
Central estimate of discounted cash flows for future claims - 195
Central estimate of discounted future reinsurance recoveries - -
Risk margin - 45
Present value of expected cash flows for future accident claims - 240
Total ACC unearned premium liability deficiency - 105

Unearned premiums relating to residual claims are excluded from this calculation as they relate to accidents that occurred prior to 1999.

Key Assumptions

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

(i) Risk-free discount rates

The projected cash flows were discounted using a series of forward discount rates at the balance date derived from the yield curve for New Zealand government bonds. The equivalent single effective discount rate taking into account ACC's projected future cash flow patterns is a short term discount rate of 5.61% (2010: 5.69% up to 10 years) and a long term discount rate of 6.00% beyond 17 years (2010: 6.00% beyond 16 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) Case management and the ‘tail' of claims

Assumptions for the incidence of settlements and claims closures are primarily based on investigations of previous experience and other factors including expectations of future events that are 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.

Note 25: Insurance Liabilities (continued)
  30 June 2011 30 June 2011 30 June 2010 30 June 2010
  Next Year Beyond
Next Year
Next Year Beyond
Next Year

Summary of assumptions

       
Average weighted term to settlement from reporting date 14 years   13 years  
  7 months   10 months  
Weighted average risk margin 12.8%   12.8%  
Probability of adequacy of liability 75.0%   75.0%  
Risk margin for liability adequacy test 18.0%   18.0%  
Probability of adequacy of liability to cover unearned premiums 75.0%   75.0%  
Risk-free discount rate1 2.8% 3.8% to 6.2% 3.5% 4.5% to 6.2%
Inflation rates (excluding superimposed inflation):        
Weekly compensation 3.8% 3.5% 3.4% 3.4% to 3.5%
Impairment benefits 4.5% 2.5% to 2.9% 2.0% 2.4% to 5.9%
Social rehabilitation benefits (serious and non serious injury) 3.0% 2.7% 2.6% 2.6% to 2.7%
Hospital rehabilitation benefits 3.0% 2.7% 2.6% 2.6% to 2.7%
Medical costs 3.0% 2.7% 2.6% 2.6% to 2.7%
Superimposed inflation:        
Social rehabilitation benefits (serious injury) 1.7% 2.9% to 4.9% 2.3% 2.4% to 8.6%
Social rehabilitation benefits (non-serious injury) 2.5% 2.0% to 2.5% 4.5% 2.0% to 2.5%
Hospital rehabilitation benefits 5.0% 4.0% to 5.0% 5.0% 4.0% to 5.0%
Medical costs (GP's & physiotherapists) 2.0% 2.0% to 3.0% 1.0% 3.5% to 9.5%
Medical costs others (specialists) 1.8% 1.8% to 2.5% 2.0% 2.5% to 6.0%

1. The risk-free discount rate beyond 17 years is 6.0% (2010: the rate beyond 16 years was 6.0%).

Note 25: Insurance Liabilities (continued)

Sensitivity Analysis

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

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

 
  Change Impact on liability Actual
    30 June 2011
$m
30 June 2010
$m

Sensitivity of assumptions

     
Average weighted term to settlement from reporting date +1 year (735) (732)
  -1 year 758 754
Risk-free discount rate +1% (3,005) (2,828)
  -1% 3,937 3,668
Inflation rates (including superimposed inflation) +1% 4,085 3,850
  -1% (3,163) (2,986)
Social rehabilitation benefits - superimposed inflation for non-serious injury claims +1% 741 737
  -1% (719) (528)
Social rehabilitation benefits - superimposed inflation after four years for serious injury claims +1% 1,904 1,606
  -1% (1,415) (1,217)

Undiscounted outstanding claims liability

The reported outstanding claims liability (before risk margin) of $21,721 million (2010: $21,654 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 2011. These estimated cash flows include the effects of assumed future inflation.

 
  Actual
  30 June 2011
$m
30 June 2010
$m
No later than 1 year 1,834 2,025
Later than 1 year and no later than 2 years 1,378 1,495
Later than 2 years and no later than 5 years 3,728 3,936
Later than 5 years and no later than 10 years 5,884 6,040
Later than 10 years and no later than 15 years 5,800 5,896
Later than 15 years and no later than 20 years 5,842 5,876
Later than 20 years and no later than 25 years 5,952 5,867
Later than 25 years and no later than 30 years 6,034 5,793
Later than 30 years and no later than 35 years 5,996 5,613
Later than 35 years and no later than 40 years 5,845 5,331
Later than 40 years and no later than 45 years 5,567 4,958
Later than 45 years and no later than 50 years 5,136 4,468
Later than 50 years 15,899 12,470
Undiscounted outstanding claims liability 74,895 69,768

Analysis of EQC insurance liability

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

EQC recognises a liability in respect of outstanding claims and assesses the adequacy of its unearned premium liability. As required by financial reporting standards, a risk margin is applied to a central estimate to increase to 75% the likelihood that claims will be settled within this amount.

 
  Actual
  30 June 2011
$m
30 June 2010
$m

The EQC liability comprises:

   
EQC outstanding claims liability 10,204 12
EQC unearned premium liability 46 46
EQC unearned premium liability deficiency 320 30
Total EQC liability 10,570 88

By type

   
Property damage claims in relation to Canterbury earthquakes 10,151 -
Other insurance liabilities 419 88
Total EQC liability 10,570 88

Analysis of Outstanding EQC Insurance Liability

   
Undiscounted outstanding claims liability 10,535 12
Discount adjustment (891) -
Risk margin 560 -
Total outstanding EQC insurance liability 10,204 12
Expected future claims payments - central estimate 9,035 11
Claims handling expenses 609 1
Outstanding claims liability before risk margin 9,644 12
Risk margin 560 -
Total outstanding EQC insurance liability 10,204 12

Movement in Outstanding EQC Insurance Liability

   
Opening balance 12 9
Claims incurred for the year - Canterbury earthquakes 11,380 -
Claims incurred for the year - other 68 40
Claims paid out in the year (1,256) (37)
Discount rate unwind - -
Experience adjustments (actuarial gains and losses): -  
- actual and assumed claim experience - -
- change in discount rate - -
- change in inflation rate - -
- change in other economic assumptions - -
Other movements - -
Closing outstanding EQC insurance liability 10,204 12

Note 25: Insurance Liabilities (continued)

Note 25: Insurance Liabilities (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Movement in EQC Unearned Premium Liability

   
Opening balance 46 45
Earning of premiums previously deferred (46) (45)
Deferral of premiums on current year contracts 46 46
Other - -
Closing EQC unearned premium liability 46 46

Analysis of EQC unearned premium liability deficiency

   
Unearned premium liability 46 46
Central estimate of discounted cash flows for future claims 313 76
Central estimate of discounted future reinsurance recoveries (11) (8)
Risk margin 64 8
Present value of expected cash flows for future claims 366 76
Total EQC unearned premium liability deficiency 320 30

Key Assumptions

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

(i) Weighted average term to settlement

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

(ii) Claims inflation rate

The claims inflation rates have made some allowance for higher levels of claims inflation for the building claims. In addition, the risk margin implicitly allows for somewhat higher levels of claims inflation.

(iii) Risk-free discount rate

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

(iv) Risk margin

The risk margins are derived directly from the claims distributions produced by the net incurred claims models. The risk margin is expressed as a percentage of the net discounted outstanding claims liability and is intended to achieve a 75% probability of adequacy in meeting the actual amount of liability to which it relates.

(v) Claims handling expenses ratio

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

Note 25: Insurance Liabilities (continued)
  30 June 2011
Summary of assumptions  
Weighted average term to settlement 0.3 to 1.9 years
Claims inflation rate 2.5% to 5.0%
Risk-free discount rate 2.84% to 6.24%
Risk margin 10.4%
Claims handling expense ratio 6.1%

Sensitivity Analysis

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

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

Note 25: Insurance Liabilities (continued)
    Impact on
liability
Actual
    30 June 2011
$m

Sensitivity of assumptions

   
Weighted average term to settlement + 0.5 years (31)
  - 0.5 years 35
Claims inflation rate +1% 105
  -1% (107)
Risk-free discount rate +1% (125)
  -1% 143
Risk margin +1% 54
  -1% (54)
Claims handling expense ratio +1% 59
  -1% (59)

Note 25: Insurance Liabilities (continued)

Analysis of AMI insurance liability

AMI is a fire and general insurance company, specialising in motor vehicle, house, contents, boat and farm insurance.

Finity Consulting Pty Limited have prepared the independent actuarial estimate of the AMI claims liability as at 30 June 2011. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

Note 25: Insurance Liabilities (continued)
  Actual
  30 June 2011
$m

The AMI liability comprises:

 
AMI outstanding claims liability 1,985
AMI unearned premium liability 97
AMI unearned premium liability deficiency -
Total AMI liability 2,082

By type

 
Property damage claims in relation to Canterbury earthquakes 1,937
Other insurance liabilities 145
Total AMI liability 2,082

Analysis of Outstanding AMI Claims Liability

 
Undiscounted outstanding claims liability 1,846
Discount adjustment (95)
Risk margin 234
Total outstanding AMI claims liability 1,985
Expected future claims payments - central estimate 1,715
Claims handling expenses 36
Outstanding claims liability before risk margin 1,751
Risk margin 234
Total outstanding AMI claims liability 1,985

Movement in Outstanding AMI Claims Liability

 
Opening balance -
Claims liability acquired through business combination 1,928
Claims incurred for the year - Canterbury earthquakes 95
Claims incurred for the year - other 42
Claims paid out in the year (80)
Discount rate unwind -
Experience adjustments (actuarial gains and losses):  
- actual and assumed claim experience -
- change in discount rate -
- change in inflation rate -
- change in other economic assumptions -
Other movements -
Closing outstanding AMI claims liability 1,985
Note 25: Insurance Liabilities (continued)
  Actual
  30 June 2011
$m

Movement in AMI Unearned Premium Liability

 
Opening balance -
Claims liability acquired through business combination 96
Earning of premiums previously deferred 43
Deferral of premiums on current year contracts (42)
Other -
Closing AMI unearned premium liability 97

Analysis of AMI unearned premium liability deficiency

 
Unearned premium liability -
Central estimate of discounted cash flows for future claims -
Central estimate of discounted future reinsurance recoveries -
Risk margin -
Present value of expected cash flows for future claims -
Total AMI unearned premium liability deficiency -

Key Assumptions

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

(i) Average weighted term to settlement

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

(ii) Inflation

The actuarial models adopted allows for any inflationary impact which is likely to affect future claims payments. A 6% inflation assumption has been made relating to building costs in Canterbury.

(iii) Discount rate

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

(iv) Risk margin

The risk margin was determined at a line of business level, allowing for the uncertainty of the outstanding claims estimate for each line of business. Uncertainty was analysed for each portfolio, taking into account past volatility in general insurance claims, actuarial model and parameter error, and diversification between the lines of business. The risk margin is intended to achieve at least a 75% probability of adequacy for the outstanding claims.

Note 25: Insurance Liabilities (continued)
 

30 June 2011

Summary of assumptions

 
Average weighted term to settlement from reporting date  
Earthquake related claims 2.6 years
Non-earthquake related claims 0.4 years
Inflation (earthquake related claims)  
Building costs 6.0%
Other cover types 3.0%
Risk-free discount rate 2.74% to 4.58%
Weighted average risk margin  
Earthquake related claims 14.1%
Non-earthquake related claims 9.0%
Probability of adequacy of liability 75.0%
Risk margin for liability adequacy test 9.0%
Probability of adequacy of liability to cover unearned premiums 75.0%

Sensitivity Analysis

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

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

Note 25: Insurance Liabilities (continued)
  Change Impact on
liability
Actual
    30 June 2011
$m
Sensitivity of assumptions    
Inflation (earthquake related claims) +1% 27
  -1% (26)
Risk-free discount rate +1% (14)
  -1% 14
Weighted average risk margin Earthquake related claims +1% 15
  -1% (15)

Note 26: Retirement Plan Liabilities

Note 26: Retirement Plan Liabilities
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
8,817 9,268 Government Superannuation Fund (GSF) 10,152 9,936
4 3 Other funds 4 4
8,821 9,271 Total retirement plan liabilities 10,156 9,940
   

By source

   
8,819 9,269 Core Crown 10,154 9,938
1 1 Crown entities 1 1
1 1 State-owned enterprises 1 1
- - Inter-segment eliminations - -
8,821 9,271 Total retirement plan liabilities 10,156 9,940

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 the Government Actuary as at 30 June 2011. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from the GSF in respect of past service to be estimated and then discounted back to the valuation date.

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

Note 26: Retirement Plan Liabilities (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Net GSF Obligation

   
Present value of defined benefit obligation 13,311 12,881
Fair value of plan assets (3,159) (2,945)
Present value of unfunded defined benefit obligation 10,152 9,936

Present value of defined benefit obligation

   
Opening defined benefit obligation 12,881 11,792
Expected current service cost 111 122
Expected unwind of discount rate 448 447
Actuarial losses/(gains) 733 1,348
Benefits paid (863) (826)
Other 1 (2)
Closing defined benefit obligation 13,311 12,881

Fair value of plan assets

   
Opening fair value of plan assets 2,945 2,804
Expected return on plan assets 177 168
Actuarial gains/(losses) 159 117
Funding of benefits paid by Government 663 611
Contributions from other entities 23 13
Contributions from members 54 60
Benefits paid (863) (826)
Other 1 (2)
Closing fair value of plan assets 3,159 2,945

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

Note 26: Retirement Plan Liabilities (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Personnel Expenses

   
    Expected current service cost 111 122
    Expected unwind of discount rate on GSF obligation 448 447
    Expected return on plan assets (177) (168)
    Contributions from members and funding employers (77) (73)
    Past service cost - -
357 281 Total included in personnel expenses 305 328
   

Net (Gains)/Losses on Non-Financial Instruments

   
- (287) Actuarial losses recognised in the year 574 1,231
357 (6) Total GSF expense 879 1,559

The Government expects to make a contribution of $679 million to GSF in the year ended 30 June 2012.

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

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

Note 26: Retirement Plan Liabilities (continued)
  Actual
  30 June 2011
%
30 June 2010
%

Summary of assumptions

   

For following year

   
Discount rate 2.84% 3.48%
Expected return on plan assets 6.00% 6.00%
Expected rate of salary increases 3.00% 3.00%
Expected rate of inflation 3.00% 5.90%

Beyond next year

   
Discount rates between 2 and 16 years 3.81% to 6.24% 4.45% to 6.21%
Discount rate from 17 years onwards 6.00% 6.00%
Expected return on plan assets 6.00% 6.00%
Expected rate of salary increases 3.00% 3.00%
Expected rate of inflation from 2 to 15 years 2.50% 2.40% to 2.50%
Expected rate of inflation from 16 years onwards 2.50% 2.50%

The 2011 valuation includes an adjustment for improvements in mortality assumptions. This assumption is calculated at 0.25% of total past service liability and results in an increase in the GSF obligation of $325 million and a corresponding increase in actuarial losses.

Note 26: Retirement Plan Liabilities (continued)

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

Note 26: Retirement Plan Liabilities (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m
Equity instruments 1,587 1,551
Other debt instruments 707 776
Property 150 168
Other 715 450
Fair value of plan assets 3,159 2,945

The expected rate of return on the plan assets of 6.00% (2010: 6.00%) has been calculated by taking the expected long term returns from each asset class, reduced by tax and investment expenses (using the current rates of tax and investment expenses).

The actual return on plan assets for the year ended 30 June 2011 was 11.63%, or $336 million (2010: 10.42% or $285 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:

Note 26: Retirement Plan Liabilities (continued)
  Change Impact on obligation
Actual
    30 June 2011
$m
30 June 2010
$m

Sensitivity of assumptions

     
Discount rate + 1% (1,236) (1,243)
  - 1% 1,480 1,492

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

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

Note 26: Retirement Plan Liabilities (continued)
  Impact on operating balance
Actual
Impact on net worth
Actual
Change in share prices 30 June 2011
$m
30 June 2010
$m
30 June 2011
$m
30 June 2010
$m
Strengthen/weaken by 10% 159 155 159 155

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

Historical Analysis

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

Note 26: Retirement Plan Liabilities (continued)
    Actual
  30 June 2011
$m
30 June 2010
$m
30 June 2009
$m
30 June 2008
$m
Present value of defined benefit obligation 13,311 12,881 11,792 11,831
Fair value of plan assets (3,159) (2,945) (2,804) (3,574)
Present value of unfunded defined benefit obligation 10,152 9,936 8,988 8,257
Experience adjustment - increase/(decrease) in plan liabilities 388 286 79 164
Experience adjustment - increase/(decrease) in plan assets 159 117 (806) (479)
Total experience adjustments (229) (169) (885) (643)
Changes in actuarial assumptions (345) (1,062) 190 (455)
Actuarial (losses)/gains recognised in the year (574) (1,231) (695) (1,098)

Undiscounted defined benefit obligation

The reported GSF defined benefit obligation of $13,311 million (2010: $12,881 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 2011. These estimated cash flows include the effects of assumed future inflation.

Note 26: Retirement Plan Liabilities (continued)
  30 June 2011
$m
30 June 2010
$m
No later than 1 year 866 841
Later than 1 year and no later than 2 years 875 878
Later than 2 years and no later than 5 years 2,655 2,646
Later than 5 years and no later than 10 years 4,489 4,464
Later than 10 years and no later than 15 years 4,371 4,392
Later than 15 years and no later than 20 years 4,001 4,066
Later than 20 years and no later than 25 years 3,400 3,510
Later than 25 years and no later than 30 years 2,607 2,742
Later than 30 years and no later than 35 years 1,804 1,935
Later than 35 years and no later than 40 years 1,121 1,230
Later than 40 years and no later than 45 years 620 699
Later than 45 years and no later than 50 years 298 349
Undiscounted defined benefit obligation 27,107 27,752

After 50 years there is expected to be a reducing level of cash for a further 20 years totalling approximately $168 million (2010: $211 million).

Note 27: Provisions

Note 27: Provisions
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

By type

   
2,516 2,896 Provision for employee entitlements 3,050 2,836
722 928 Provision for ETS credits 612 74
- - Provision for future retail deposit guarantee scheme payments - 748
883 965 Provision for National Provident Fund guarantee 983 1,007
- - Provision for Canterbury Red Zone support package 1,039 -
- 697 Provision for weathertight services financial assistance package 567 -
1,034 3,349 Other provisions1 1,335 1,319
5,155 8,835 Total provisions 7,586 5,984
   

By source

   
2,788 6,258 Core Crown 5,351 3,424
1,563 1,698 Crown entities 1,770 1,695
862 952 State-owned enterprises 1,028 925
(58) (73) Inter-segment eliminations (563) (60)
5,155 8,835 Total provisions 7,586 5,984
   

By maturity

   
2,165 2,850 Expected to be settled within one year 4,656 2,741
2,990 5,985 Expected to be outstanding for more than one year 2,930 3,243
5,155 8,835 Total provisions 7,586 5,984

1. The Budget 2011 forecast of $3,349 million included an unspecified provision of $1,565 million to cover potential costs in relation to the Canterbury earthquakes.

Note 27: Provisions (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Provision for employee entitlements

   
Opening provision 2,836 2,580
Additional provisions recognised 1,733 1,872
Provision used during the period (1,464) (1,387)
Reversal of previous provision (64) (228)
Unwind of discount rate 9 (1)
Effect of changes in discount rate - -
Closing provision 3,050 2,836

The provision for employee entitlements represents annual leave, accrued long service leave and retiring leave, and sick leave entitlements accrued by employees. Probability assumptions about continued future service affecting entitlements accrued as at reporting date have been made using previous employment data. For entitlements that vest over a period exceeding one year discount rates between 3% and 6% have been used.

Note 27: Provisions (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Provision for ETS credits

   
Opening provision 74 17
New provision recognised during the period (ETS expenses) 860 80
Provision used during the period (ETS revenue) (322) (23)
Reversal of previous provision - -
Closing provision 612 74

The Emissions Trading Scheme (ETS) was established to encourage a reduction in New Zealand's greenhouse gas emissions. The ETS creates a limited number of tradable units (the NZ Unit) which the Government can allocate freely. The allocation of NZ Units creates a provision (and an expense if allocated for free). The provision is reduced, and revenue recognised, as NZ Units are surrendered to the Crown by emitters. Emitters can also use international Kyoto units to settle their emission obligation, which might occur where obligations exceed the number of allocated NZ Units. In the ETS transition period to the end of 2012, emitters can also use the NZ$25 price option to settle their emission obligation.

Until the end of 2012, the Government's net position regarding its climate change obligations will be determined by the net Kyoto position and the provisions for ETS credits. After 2012, the net position will depend on any future international climate change commitments.

The carbon price used to calculate the ETS provision is based on the estimated current carbon price of €11.63. The carbon price in New Zealand dollars equates to $NZ20.28 (2010: $NZ18.94), using the 30 June 2011 exchange rate of €0.5734 =$NZ1 (30 June 2010: €0.5677 = $NZ1, and a carbon price of €10.75 per unit).

The carbon price for the ETS provision has been determined by the Ministry for the Environment based on international market transactions that have occurred in the certified emission reduction (CER) markets. Currently, the CER market has been determined to be the most relevant market to use for determining the carbon price for NZ Units and the calculation of the provision for ETS credits, then the market for Kyoto assigned amount units (AAUs). As the market for NZ Units develops the basis for determining this carbon price will be reviewed.

Note 27: Provisions (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m
Provision for future retail deposit guarantee scheme payments    
Opening provision 748 831
New provision recognised during the period - -
Provision used during the period (746) (47)
Reversal of previous provision (2) (36)
Unwind of discount rate and effect of changes in discount rate - -
Closing provision - 748

The provision for future retail deposit guarantee scheme payments was eliminated during the year as payments were made to depositors of entities that defaulted during the year.

Note 27: Provisions (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Provision for National Provident Fund guarantee

   
Opening provision 1,007 954
Additional provisions recognised - 28
Provision used during the period (75) (77)
Reversal of previous provision (22) (6)
Unwind of discount rate and effect of changes in discount rate 73 108
Closing provision 983 1,007

The Government has guaranteed superannuation schemes managed by the National Provident Fund (NPF) (refer to note 32 for details of the guarantee). Included in the provision is the NPF's DBP Annuitants Scheme unfunded liability position of $981 million (2010: $1,003 million), represented by a gross estimated pension obligation of $1,020 million (2010: $1,053 million) with net investment assets valued at $39 million (2010: $50 million).

Note 27: Provisions (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Provision for Canterbury Red Zone support package

   
Opening provision - -
Additional provisions recognised 1,039 -
Provision used during the period - -
Reversal of previous provision - -
Unwind of discount rate and effect of changes in discount rate - -
Closing provision 1,039 -

Net provision

   
Provision for Red Zone properties 1,039 -
Estimated insurance proceeds from Red Zone Properties 386 -
Net provision for Red Zone properties 653 -

Melville Jessup Weaver has prepared an independent actuarial valuation of both the estimated cost of purchasing the red zone properties and the estimated insurance proceeds from those properties as at 30 June 2011 using quantity surveying data and aggregate information regarding the level of land damage in the red zone. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine these valuations.

Note 27: Provisions (continued)

Key Assumptions

The key assumptions and the methodology applied in the valuation of the red zone valuations are as follows:

(i) Option choice

The valuation has assumed that homeowners will choose option B (purchase land only) if the expected total damage is greater than 80% of the improvement value of the property.

(ii) Price of purchase

The price the Government has to pay to purchase properties under option A and B are the 2007 capital value rating and land value rating issued by the Christchurch City Council. An allowance has been made for subsequent improvements to properties since 2007.

(iii) Insurance recoveries

Insurance recoveries are based on current insurance policy settings (including coverage and excess limits). Individual policies may differ between insurers. Therefore a number of policies were reviewed to establish “typical” policy settings. Assumptions have also been made regarding the proportion of damage to red zone properties.

(iv) Discount rate

Due to the short term nature of the liabilities the impact of discounting is not generally material. Where applicable, claims and recoveries have been discounted using a risk-free rate based on New Zealand Government bonds and the payment profile of the underlying cash flows.

Sensitivity Analysis

The net provision for red zone properties is most sensitive to the assumption regarding the choice of option A or option B. The table below illustrates the impact if the expected current assumption threshold (80%) is changed:

Note 27: Provisions (continued)
  Change Impact on net
obligation
Actual
    30 June 2011
$m

Sensitivity of assumptions

   
Damage threshold + 10% 12
  - 10% (20)
Note 27: Provisions (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Provision for weathertight services financial assistance package

   
Opening provision - -
Additional provisions recognised 567 -
Provision used during the period - -
Reversal of previous provision - -
Unwind of discount rate and effect of changes in discount rate - -
Closing provision 567 -

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

Description of weathertight services financial assistance package (FAP)

The FAP offers qualifying homeowners a share of the agreed actual repair cost of repairing leaky homes. The Government and the Territorial Authority (if the Territorial Authority is participating in the FAP) each pay 25% of the agreed repair cost and the homeowner pays the remaining 50%. Under the FAP the homeowner agrees not to sue contributing Territorial Authorities and the government, although homeowners can still pursue other liable parties such as builders, developers and manufacturers of defective products.

The FAP scheme became available to homeowners from 29 July 2011 and eligible homeowners must lodge claims with the Department of Building and Housing prior to 29 July 2016. The 10 year limitation on lodging a weathertight claim means that over time the forecast eligible claims will reduce.

Key Assumptions

Due to the early stage of the claims process for this support package, there is considerably uncertainty attached to this provision and what the ultimate cost of the Government's contribution will be under the FAP. Because there are no claims as at the reporting date under the FAP, actuarial analysis of experience has not been possible. Therefore the Department of Building and Housing management have estimated the provision applying three critical assumptions; the number of eligible homes, the take-up rate, and the cost of repair.

The most critical assumption in estimating the Governments obligations under the FAP is the number of weathertightness failures in New Zealand, from which a forecast of eligible claims can be derived, recognising the requirement that houses must have been built or altered (if the alterations leak) within 10 years of the date of lodging a claim.

In 2009, a report prepared by PriceWaterhouseCoopers (PwC) estimated the total number and economic costs of weathertightness failures in New Zealand. The total estimated failures were in the range of 22,000 to 89,000, with experts agreeing on a consensus of approximately 42,000 failures, which is the number of eligible homes used in calculating the provision.

The second most critical assumption is the take-up rate for the scheme. In the absence of historical data or sufficiently comparable programmes that may be used as a proxy, a take-up rate of 70% was estimated. This rate is higher than several territorial authorities and takes the following into consideration:

  • the level of awareness of the scheme and certainty over eligibility rules providing an effective resolution to the cost of the weathertightness issue
  • the certainty the scheme offers over the total amount owners can expect to receive fairly quickly to get their homes repaired
  • the wide consultation with stakeholders in designing the scheme to obtain support and acceptance of it
  • the desire of owners to avoid the legal and evidential costs, time delays and stress of dispute resolution or litigation
  • the recognition by owners that damaged homes tend to deteriorate, with wider damage and higher repair costs.

The third critical assumption is the assumed cost of repair per eligible homes at $241,474. The 2009 PwC report estimated the typical cost (repair cost and transaction cost) for three categories of weathertightness failure (maintenance, targeted repair and full repair). The estimate of costs was prepared using data sourced from Weathertight Homes Resolution Service claims, North Island territorial authorities, a property manager and Home Owners and Buyers Association of New Zealand. A weighted average of the cost of the typical cost of repair has been used, updated for inflation and excluding the legal costs assumed in PwC’s report.

Sensitivity Analysis

The sensitivity of the provision for FAP against the three critical assumptions described above is further described below:

Note 27: Provisions (continued)
  Change Impact on
Provision
    30 June 2011
$m

Sensitivity of assumptions

   
Number of eligible houses +1,000 49.7
  -1,000 (49.7)
Take-up rates +10% 78.8
  -20%1 (148.2)
Repair costs +10% 56.7
  -10% (56.7)

1. This assumption ie, 50% has been applied by several territorial authorities in making a provision for their share of costs.

Note 27: Provisions (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Other provisions

   
Opening provision 1,319 1,171
Additional provisions recognised 294 524
Provision used during the period (33) (385)
Reversal of previous provision (261) (14)
Unwind of discount rate and effect of changes in discount rate 16 23
Closing provision 1,335 1,319

Note 28: Net Worth

Note 28: Net Worth
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
26,983 21,720 Taxpayer funds 18,726 31,087
62,086 63,600 Property, plant and equipment revaluation reserve 62,152 63,593
62 63 Investment revaluation reserve 58 59
(186) (219) Cash flow hedge reserve (310) (143)
24 (47) Foreign currency translation reserve (47) (10)
447 402 Net worth attributable to minority interest in Air New Zealand 308 402
89,416 85,519 Total net worth 80,887 94,988
   

Taxpayer Funds

   
34,027 31,087 Opening taxpayers funds 31,087 36,382
(7,067) (9,437) Operating balance excluding minority interest (13,360) (4,509)
24 62 Transfers from/(to) property, plant and equipment revaluation reserve 460 (785)
(1) 8 Other movements 1 (1)
26,983 21,720 Closing taxpayers funds 18,188 31,087
   

Property, Plant and Equipment Revaluation Reserve

   
62,110 63,593 Opening revaluation reserve 63,593 62,612
- 69 Net revaluations (443) 196
(24) (62) Transfers from/(to) taxpayer funds (460) 785
62,086 63,600 Closing revaluation reserve 62,690 63,593

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

Note 28: Net Worth (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Investment Revaluation Reserve

   
61 59 Opening investment revaluation reserve 59 56
1 4 Increase arising on revaluation of available-for-sale financial assets (1) 1
- - Cumulative (gain)/loss transferred to the statement of financial performance on sale of available-for-sale financial assets - 2
62 63 Closing investment revaluation reserve 58 59

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

Note 28: Net Worth (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Cash Flow Hedge Reserve

   
(190) (143) Opening cash flow hedge reserve (143) 18
5 (52) Transfer into reserve (279) (96)
(1) (16) Transfer to the statement of financial performance 17 (62)
- (8) Transfer to initial carrying value of hedged item 95 (3)
(186) (219) Closing cash flow hedge reserve (310) (143)

The cash flow hedge reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The cumulative deferred gain or loss on the hedge is recognised in the statement of financial performance when the hedged transaction impacts the statement of financial performance, or is included as a basis adjustment to the non-financial hedged item, consistent with the applicable accounting policy.

Note 28: Net Worth (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Foreign currency translation reserve

   
24 (10) Opening foreign currency translation reserve (10) -
- (37) Arising from translation of foreign operations (37) (10)
24 (47) Closing foreign currency translation reserve (47) (10)

The foreign currency translation reserve holds foreign exchange gains and losses arising from translating monetary items that form part of the net investment in a foreign operation into New Zealand dollars.

It also includes foreign exchange gains and losses associated with translating non-monetary assets into New Zealand dollars if revaluations of those assets are reflected in another reserve rather than in the statement of financial performance.

Note 28: Net Worth (continued)
Forecast
30 June 2011
  Actual
Budget 10
$m
Budget 11
$m
  30 June 2011
$m
30 June 2010
$m
   

Net Worth Attributable to Minority Interest in Air New Zealand

   
447 402 Opening minority interest 402 447
- - Operating balance attributable to minority interests (101) (17)
- - Transactions with minority interest (20) (11)
- - Other movements 27 (17)
447 402 Closing minority interest 308 402

Minority interest represent the interests of minority holders of Air New Zealand shares. Transactions with

minority interests include dividend payments and dividend reinvestments.

Note 29: Capital Objectives and Fiscal Policy

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

  • reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year
  • once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues
  • achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future
  • managing prudently the fiscal risks facing the Government, and
  • pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.

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

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

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

Long Term Fiscal Intentions
Fiscal Strategy Report 2010 Fiscal Strategy Report 2011

Debt

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

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

We will do this by ensuring that net debt remains consistently below 40% of GDP, and is then brought back to a level no higher than 20% of GDP by the early 2020s. We will work towards achieving this earlier as conditions permit.

Debt

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

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

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

Operating balance

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

Operating balance

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

Operating expenses

Reduce the growth in government spending to ensure operating expenses are consistent with the operating balance objective.

Operating expenses

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

Operating revenues

Ensure sufficient operating revenue to meet the operating balance objective.

Operating revenues

Ensure sufficient operating revenue to meet the operating balance objective.

Net worth

Ensure net worth remains at a level sufficient to act as a buffer to economic shocks. Over the medium term, net worth will continue to fall as the impact of the global financial crisis unfolds. Consistent with the debt and operating balance objectives, we will start building up net worth ahead of the demographic change expected in the mid-2020s.

Net worth

Ensure net worth remains at a level sufficient to act as a buffer to economic shocks. Over the medium term, net worth will continue to fall as the impact of the global financial crisis unfolds. Consistent with the debt and operating balance objectives, we will start building up net worth ahead of the demographic change expected in the mid-2020s.

Short Term Fiscal Intentions
Fiscal Strategy Report 2010 Fiscal Strategy Report 2011 Fiscal Position 20111

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 35.3% of GDP in 2013/14.

Core Crown net debt (excluding NZS Fund and advances) is forecast to be 26.5% in 2013/14.

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 37.2% of GDP in 2014/15.

Core Crown net debt (excluding NZS Fund and advances) is forecast to be 29.6% in 2014/15.

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) at 30 June 2011 was 38.6% of GDP (2010: 31.1%).

Core Crown net debt (excluding NZS Fund and advances) at 30 June 2011 was 20.0% of GDP (2010: 14.1%).

Operating balance

Based on the operating allowance for the 2010 Budget, the operating deficit is forecast to be 3.5% of GDP in 2010/11. The operating deficit is forecast to be 0.3% of GDP in 2013/14. This decrease is consistent with the long-term objective for the operating balance.

Operating balance

Based on the operating allowance for the 2011 Budget, the operating deficit is forecast to be 3.5% of GDP in 2011/12. The operating balance is forecast to be 1.9% of GDP in 2014/15. This is consistent with the long-term objective for the operating balance.

The operating deficit (before gains and losses) is expected to be 4.7% in 2011/12.

Operating balance

The operating deficit was 6.7% of GDP for the year ended 30 June 2011 (2010: 2.4%).

Expenses

Total Crown expenses are forecast to be 42.4% of GDP in 2013/14.

Core Crown expenses are forecast to be 32.4% of GDP in 2013/14.

This assumes a new operating allowance of $1.1 billion per annum for the 2010 Budget growing at 2% for Budgets thereafter (GST exclusive).

Expenses

Total Crown expenses are forecast to be 40.5% of GDP in 2014/15.

Core Crown expenses are forecast to be 31.3% of GDP in 2014/15.

This assumes a new operating allowance of $0.8 billion per annum for Budgets 2012 and 2013, then returning to $1.19 billion, growing at 2% for Budgets thereafter (GST exclusive).

Expenses

Total Crown expenses were 49.9% of GDP for the year ended 30 June 2011 (2010: 42.8%).

Core Crown expenses were 35.2% GDP for the year ended 30 June 2011 (2010: 33.8%).

Revenues

Total Crown revenues are forecast to be 41.1% of GDP in 2013/14.

Core Crown revenues are forecast to be 30.7% of GDP in 2013/14.

Core Crown tax revenues are forecast to be 27.5% of GDP in 2013/14.

Revenues

Total Crown revenues are forecast to be 41.0% of GDP in 2014/15.

Core Crown revenues are forecast to be 31.0% of GDP in 2014/15.

Core Crown tax revenues are forecast to be 27.8% of GDP in 2014/15.

Revenues

Total Crown revenues were 40.7% of GDP for the year ended 30 June 2011 (2010: 39.5%).

Core Crown revenues were 28.7% of GDP for the year ended 30 June 2011 (2010: 29.7%).

Core Crown tax revenues were 25.7% of GDP for the year ended 30 June 2011 (2010: 26.8%).

Net worth

Total Crown net worth is forecast to be 34.8% of GDP in 2013/14.

Core Crown net worth is forecast to be 10.7% of GDP in 2013/14.

Net worth

Total Crown net worth is forecast to be 34.1% of GDP in 2014/15.

Core Crown net worth is forecast to be 7.9% of GDP in 2014/15.

Net worth

Total Crown net worth was 40.4% of GDP as at 30 June 2011 (2010: 50.2%).

Core Crown net worth was 17.4% of GDP as at 30 June 2011 (2010: 23.6%).

1. Comparative GDP percentages have been updated to reflect restated Statistics New Zealand nominal GDP.

Note 30: Canterbury Earthquakes

The Canterbury region experienced two major earthquakes during the reporting period, on 4 September 2010 and 22 February 2011 (of magnitudes 7.1 and 6.3 respectively) in addition to a number of aftershocks (including two significant earthquakes on 13 June 2011).

These consolidated financial statements report both revenue and expenses in relation to these earthquakes. These fiscal impacts have been estimated based on the information available at the time these financial statements were produced. The largest and most complex valuations have been carried out by independent professional actuaries and represent a best estimate of the costs to date. However the final costs of the Canterbury earthquakes will not be certain for some time and these estimates may differ from those final costs. As a result, information on key assumptions (along with the sensitivity of those assumptions) has been included in the relevant notes to these financial statements (eg, insurance liabilities).

Amounts recognised in the statement of financial performance in respect of the earthquakes are:

Note 30: Canterbury Earthquakes
    Actual
  Note 30 June 2011
$m

Statement of Financial Performance

   

Revenue

   
Other revenue - EQC insurance claim on reinsurers a 4,185
Other earthquake related revenue   329
Total earthquake related revenue (excluding gains)   4,514

Expenses

   
Insurance expenses - EQC insurance expenses a 11,656
Other operating expenses - Canterbury Red Zone support package b 653
Other operating expenses - AMI support package c 335
Insurance expenses - AMI insurance expenses c 95
Other operating expenses - Share of local authorities' expenses d 133
Other earthquake related expenses   729
Total earthquake related expenses (excluding losses)   13,601
Operating balance before gains/(losses)   (9,087)

These results do not represent the total expense to the Government of the earthquakes. There are still a number of costs that are to be determined (eg, the Government's share of repairs to essential infrastructure). In addition, there are still a number of significant policy decisions to be made regarding the earthquakes. These decisions will likely have fiscal costs in a future period (eg, offers in respect to the purchase of residential properties currently classified in the Orange and White Zones).

The costs outlined in this note do not include the impact on tax or other revenues as a result of the earthquakes. The estimates are based on current government policy and do not include costs that the Government has not yet committed to, whether or not they are under active consideration, but which may yet arise in association with the earthquakes.

Details of the significant costs are included below. In addition, the Government has also announced or incurred other expenses such as wage subsidies, temporary accommodation, community and trauma support, and other support assistance. There has also been some damage to central government assets such as hospitals, schools, state housing and state highways.

The Government's contribution to repairing local roads damaged by the earthquakes is expected to be funded from the National Land Transport Fund (the “NLTF”). As a result, the costs associated with the repair of local roads will be recognised when claims are made to the fund and accepted by the New Zealand Transport Agency. The NLTF is funded primarily by the collection of road user charges, fuel excise duties, and registration fees.

The most significant “other” expense is in relation to welfare support packages which totalled $363 million for the year.

Note a - Earthquake Commission (EQC) Costs

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

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

EQC's obligation (and reinsurance recoveries) in relation to the earthquakes has been valued by an independent actuary (Melville Jessup Weaver). The Canterbury earthquakes have resulted in a higher than usual level of uncertainty in determining EQC's obligation in respect of past events. The key sources of this uncertainty are:

  • the impact of multiple events on EQC coverage and reinsurance coverage
  • severe land damage and a complex land claims environment from both an engineering and legal perspective
  • the relatively early stage of claims development, including the most recent large earthquake event on 13 June 2011, and
  • the potential for building cost inflation (“demand surge inflation”) to exceed expectations.

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

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

On 2 September the High Court issued a declaratory judgement regarding the application of the Earthquake Commission Act (1993) in situations where full cover has been reinstated after an earthquake. The estimated financial impact of this judgement has been reflected in these financial statements.

These financial statements include insurance costs (net of recoveries) of $7.5 billion for the likely costs to be incurred by EQC in settling claims for damage to residential property arising from the Canterbury earthquakes. For the year ended 30 June 2011 EQC had made cash payments of approximately $1.2 billion against this obligation.

Note 30: Canterbury Earthquakes (continued)

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

Note b - Canterbury Red Zone Support Package

On 23 June 2011 the Government announced zones of land damage in Christchurch and parts of the Waimakariri district. This land has been mapped into four zones:

  • Red (land repair would be prolonged and uneconomic at present)
  • Orange (further assessment required)
  • Green (repair/rebuild process can begin), and
  • White (not yet mapped or not residential).

Land in the red zone is unlikely to be suitable for continued residential occupation for a prolonged period of time. For this reason, the Government has also announced that it is prepared to purchase insured residential land in the red zone on a voluntary basis. There are two options for purchase:

  1. the Crown will offer to purchase the entire property at the 2007 capital value rating valuation (less any insurance payments already made on the land and/or dwelling), and will assume all open insurance claims relating to the property other than contents, or
  2. the Crown will offer to purchase the land at the greater of the following (less any land payments already made), allowing the previous property owner to pursue any open insurance claims relating to the dwelling:
    • 2007 land value rating valuation, or
    • EQC's actual land settlement under the Earthquake Commission Act 1993.

These financial statements include expenses of $653 million (net of insurance proceeds) for the cost of the red zone support package at 30 June 2011. Given the two options available to homeowners, there is an element of uncertainty and therefore the actual amount may differ to the estimate. Details of this provision (including discussion on the sensitivity of assumptions) are provided in note 27 of these financial statements.

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

Any future costs associated with the orange and white zones have not been included in these financial statements as no obligation existed at 30 June 2011. As a result, the fiscal impact of any offers to residents in these zones will be recorded in future periods.

On 18 August 2011 the Government announced it would be making offers to purchase a further 940 properties in Kaiapoi and Pines Beach north of Christchurch (previously designated in the Orange Zone). The cost of this announcement has not been included in the provision at 30 June 2011. The net cost to the Crown of this decision is estimated to be between $50 million and $75 million.

Note c - AMI Support Package

On 7 April 2011 the Government agreed to provide a back-up financial support package for AMI Insurance to give policyholders certainty and to ensure an orderly rebuild of Christchurch after the earthquakes. The expense of $335 million recognised in the consolidated financial statements represents an estimate of portion of the support package that will not be recovered by the Crown.

The ultimate level of Crown support is dependent on the financial performance of the company, particularly in relation to the liability (and resulting reinsurance recoveries) arising from the Canterbury earthquakes. The liability in relation to the earthquakes has been valued by an independent actuary (Finity Consulting Pty Limited). Key assumptions around the valuation of the liability include the number of properties damaged, the mix and cost of rebuilds versus repairs versus cash settlements, where damage will exceed the EQC limits, future claims inflation, and the timing of claims payments.

The uncertainties regarding AMI's outstanding claims liability and related reinsurance recoveries are similar to those of EQC (with the exception of risks associated with land claims). The details of this arrangement and the insurance liability at 30 June 2011 (including discussion on the sensitivity of assumptions) are outlined in note 34 and note 25 respectively.

Note d - Share of Local Authorities' Expenses

Under the current government policy setting, outlined in the National Civil Defence Emergency Management Plan (‘the Plan') and Guide to the National Civil Defence Emergency Management Plan (‘the Guide'), the Government is committed to a standard financial support package for the four local authorities in Canterbury (Christchurch City Council, Waimakariri District Council, Selwyn District Council and Environment Canterbury) as a result of the earthquakes. This support package will consist of both response and recovery costs.

Response costs

The Government has recorded an expense of $133 million in the current financial year for its share of response costs under the Guide. The majority of these costs relate to Christchurch City Council's response costs associated with caring for displaced people, temporary repairs to essential infrastructure and other precautionary measures to reduce immediate danger following the earthquakes.

Recovery costs

The Government's standard financial support under the Plan and Guide is to reimburse local authorities 60% of recovery repairs to essential infrastructure (waste water, storm water and fresh water) and river management systems. Recovery repairs are permanent repairs to restore the essential infrastructure to pre-emergency condition.

An estimate of these recovery costs in relation to the Government's obligation to fund their share of the Canterbury recovery costs has not been included in these financial statements. The earthquakes have resulted in an extremely rare situation where the current recovery estimate is not sufficiently reliable to be recorded as a liability at this point. The unreliability of the estimate is mainly due to the lack of reliable information in respect to:

  • the amount of damage to infrastructure under the ground, and
  • the basis for restoring the infrastructure, be it like-for-like, or some other method or configuration.

The current estimate from local authorities is that the Government's 60% share of permanent recovery costs may be in the range of between $348 million and $610 million. This estimate is extremely uncertain and is based on a number of local authorities' working assumptions to determine a repair bill to restore the essential infrastructure on a like-for-like basis. The majority of the recovery estimates provided relate to Christchurch City Council's and Waimakariri District Council's essential infrastructure.

A contingent liability has been included in note 32 in relation to these unquantifiable recovery costs.

Note 31: Commitments

Note 31: Commitments
  Actual
  30 June 2011
$m
30 June 2010
$m

Capital Commitments

   
Specialist military equipment 369 422
Land and buildings 701 849
Other property, plant and equipment 7,032 6,370
Other capital commitments 408 224
Tertiary Education Institutions 413 302
Total capital commitments 8,923 8,167

Operating Commitments

   
Non-cancellable accommodation leases 2,909 2,862
Other non-cancellable leases 3,171 3,230
Non-cancellable contracts for the supply of goods and services1 5,520 6,254
Other operating commitments2 7,415 7,634
Tertiary Education Institutions 366 304
Total operating commitments 19,381 20,284
Total commitments 28,304 28,451

Total Commitments by Segment

   
Core Crown 22,129 20,983
Crown entities 12,925 13,811
State-owned enterprises 10,410 11,238
Inter-segment eliminations (17,160) (17,581)
Total commitments 28,304 28,451

By Term

   

Capital Commitments

   
One year or less 4,659 4,238
From one year to two years 1,297 1,479
From two to five years 2,687 1,883
Over five years 280 567
Capital Commitments 8,923 8,167

Operating Commitments

   
One year or less 6,868 6,246
From one year to two years 3,127 4,180
From two to five years 5,100 4,788
Over five years 4,286 5,070
Operating Commitments 19,381 20,284
Total Commitments 28,304 28,451

1. The comparative figures for 2010 include an adjustment of $3,996 million for contracts which were excluded last year.

2. The comparative figures for 2010 include a reclassification of $1,742 million between third party and inter-segment eliminations.

Note 32: Contingent Liabilities and Contingent Assets

Note 32: Contingent Liabilities and Contingent Assets
  Actual
  30 June 2011
$m
30 June 2010
$m

Quantifiable Contingent Liabilities

   
Guarantees and indemnities 78 106
Uncalled capital 4,033 2,310
Legal proceedings and disputes 331 414
Other contingent liabilities 2,699 3,535
Total quantifiable contingent liabilities 7,141 6,365

Total Quantifiable Contingent Liabilities by Segment

   
Core Crown 6,884 6,050
Crown entities 173 171
State-owned enterprises 84 144
Inter-segment eliminations - -
Total quantifiable contingent liabilities 7,141 6,365

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 gross sovereign-issued debt. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to gross sovereign-issued debt.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the amount of any award against the Crown.

Quantifiable Contingent Liabilities

This part of the Statement provides details of those contingent liabilities of the Crown which can be quantified (remote contingent liabilities are excluded).

Note 32: Contingent Liabilities and Contingent Assets (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Guarantees and indemnities

   
Air New Zealand - letters of credit and performance bonds 34 49
Cook Islands - Asian Development Bank loans 12 14
Indemnification of receivers and managers - Terralink Limited 10 10
Ministry of Transport - funding guarantee 10 10
Other guarantees and indemnities 12 23
Total guarantees and indemnities 78 106

Guarantees and indemnities are disclosed in accordance with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In addition, guarantees given under Section 65ZD of the Public Finance Act 1989 are disclosed in accordance with Section 26Q(3)(b)(i)(B) of the same Act.

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. The performance bonds are primarily given in respect to engineering contracts.

Cook Islands - Asian Development Bank (ADB) loans

Before 1992, the New Zealand Government guaranteed the Cook Islands' borrowing from the ADB. These guarantees have first call on New Zealand's Official Development Assistance.

Indemnification of receivers and managers - Terralink Limited

The Crown has issued a Deed of Receivership indemnity to the appointed receivers of Terralink Limited against claims arising from the conduct of the receivership.

Ministry of Transport - funding guarantee

The Minister of Finance has issued a guarantee of $10 million to the Transport Accident Investigation Commission. The guarantee allows the Commission to assure payment to suppliers of specialist salvage equipment in the event of the Commission initiating an urgent investigation of any future significant transport accident.

Note 32: Contingent Liabilities and Contingent Assets (continued)

Note 32: Contingent Liabilities and Contingent Assets (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Uncalled capital

   
International Bank for Reconstruction and Development 991 1,185
Asian Development Bank 2,995 1,079
Bank for International Settlements 23 26
European Bank for Reconstruction and Development 12 12
Other uncalled capital 12 8
Total uncalled capital 4,033 2,310
Note 32: Contingent Liabilities and Contingent Assets (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Legal proceedings and disputes

   
Accident Compensation Corporation - 45
Tax disputes 281 295
Kapiti West Link Road - 14
Health - legal claims 18 25
Other legal proceedings and disputes 32 35
Total legal proceedings and disputes 331 414

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.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the possible amount of any award against the Crown.

Tax in dispute

Tax in dispute represents the outstanding debt of those tax assessments raised, against which an objection has been lodged and legal action is proceeding. 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.

Health - legal claims

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

Note 32: Contingent Liabilities and Contingent Assets (continued)
  Actual
  30 June 2011
$m
30 June 2010
$m

Other contingent liabilities

   
International finance organisations 1,254 1,529
Kyoto protocol units 997 1,590
New Zealand Export Credit Office 132 133
Air New Zealand partnership 77 70
Inland Revenue Department - unclaimed monies 55 50
Crown Health Financing Agency 24 26
Reserve Bank - demonetised currency 23 23
State highway extension - 41
NZTA - Auckland City Council 10 -
Other contingent liabilities 127 73
Total other contingent liabilities 2,699 3,535

International finance organisations

The Crown has lodged promissory notes with the International Monetary Fund. Payment of the notes depends upon the operation of the rules of the organisation.

Kyoto protocol units

The Government has a contingent liability relating to 74.9 million forestry credits. During the first commitment period, the Net Kyoto Position of the Crown estimates that 89.3 million tonnes of carbon credits will be generated by carbon removals via forests (2010: 89.1 million tonnes). To the extent that these forests are harvested (in subsequent commitment periods there will be an associated liability generated that will need to be repaid. The New Zealand Emission Trading Scheme transfers a portion of the potential future liability to forest owners. As at 30 June 2011, approximately 14.4 million tonnes has been transferred to forest owners in the form of New Zealand Units. The Crown's contingent liability is calculated as the remaining credits the Crown is potentially liable for (74.9 million tonnes). Using the carbon price as at 30 June 2011, this contingent liability can be measured at $997 million.

New Zealand Export Credit Office - export guarantees

The New Zealand Export Credit Office (NZECO) provides a range of guarantee products to assist New Zealand exporters. These NZECO guarantees are recorded by the Crown as contingent liabilities.

Air New Zealand partnership

The Air New Zealand Group has a partnership agreement with Pratt and Whitney in relation to the Christchurch Engineering Centre in which it holds a 49 per cent interest. By the nature of the agreement joint and several liability exists between the two parties.

Inland Revenue - unclaimed monies

Under the Unclaimed Monies Act 1971, companies (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.

Crown Health Financing Agency

The agency is subject to potential legal claims plus associated legal fees in respect of the actions of the former Area Health Boards. The agency is defending those claims that have resulted in litigation and will defend any of the others that result in litigation. The agency does not accept liability for the claims.

Reserve Bank - demonetised currency

The Crown has a contingent liability for the face value of the demonetised currency issued that has yet to be repatriated.

Auckland City Council

The New Zealand Transport Agency has received a claim from the Auckland council relating to the contamination of Stokes Point as a result of work on the Auckland Harbour Bridge.

Note 32: Contingent Liabilities and Contingent Assets (continued)

Unquantifiable Contingent Liabilities

This part of the Statement provides details of those contingent liabilities of the Crown which cannot be quantified (remote contingent liabilities are excluded).

Guarantees and Indemnities

Air New Zealand

The Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group. Air New Zealand treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.

The Company guarantees the aircraft end of lease obligations of Air New Zealand Aircraft Holdings Limited and New Zealand International Airlines Limited.

Airways Corporation of New Zealand

The Crown has indemnified Airways Corporation of New Zealand Limited as contained in Airways' contract with New Zealand Defence Force for the provision of air traffic control services. The indemnity relates to any claim brought against Airways by third parties arising from military flight operations undertaken by the Royal New Zealand Air Force.

AsureQuality Limited

The Crown has indemnified the directors of AsureQuality Limited in the event that they incur any personal liability for redundancies arising from any agreement by international trading partners that allows post-mortem meat inspection by parties other than the Ministry of Agriculture and Forestry, or its sub-contractor.

At Work Insurance Limited

The Crown has indemnified the liquidators of At Work Insurance Limited (Deloitte Touche Tohmatsu) against various employment-related claims.

Bona vacantia property

P&O NZ Ltd sought a declaratory judgement that property disclaimed by a liquidator is bona vacantia. A settlement has been reached, which includes a Crown indemnity in favour of New Zealand Aluminium Smelters and Comalco in relation to aluminium dross disposed of in their landfill, for costs that may be incurred in removing the dross and disposing of it at another site if they are required to do so by an appropriate authority. The Minister of Finance signed the indemnity on 24 November 2003. In February 2004, a similar indemnity was signed in respect of aluminium dross currently stored at another site in Invercargill.

Building Industry Authority

The Building Industry Authority (BIA) is a joint defendant in a number of claims before the courts and the Weathertight Homes Resolution Service relating to the BIA's previous role as regulator of the building industry. The BIA has been disestablished and absorbed into the Department of Building and Housing. To prevent conflicts of interest, the Treasury was given responsibility for managing weathertight claims against the BIA on behalf of the Crown from 1 July 2005. In May 2010, the Crown announced its intention to assist homeowners in getting their leaky homes repaired by contributing 25% of agreed repair costs (with affected local authorities also contributing the same amount). The Crown has also proposed that it would provide assistance to homeowners to access bank finance for the remaining agreed repair costs by way of loss share agreements to banks. Affected home owners that take up this assistance, agree to forego legal actions against the Crown.

For details relating to the provision for the Government's share of the Weathertight homes services financial assistance package refer to note 27: Provisions.

Civil Defence Emergency Management - New Zealand Local Authorities

The Guide to the National Civil Defence Emergency Management Plan (‘the Guide') states that the government will reimburse local authorities, in whole or in part, for certain types of response and recovery costs incurred as a result of a local or national emergency. The Guide is issued by the Director of Civil Defence Emergency Management (CDEM) under Section 9 of the Civil Defence Emergency Management Act 2002.

Examples of emergencies covered by the Guide include:

  1. natural disasters, such as flood, storm, cyclone, snowstorm, earthquake, volcanic, geothermal incident, tsunami, landslide, and lahar, and
  2. non-natural events, such as certain lifeline utility failure.

Under current policy as set out in the Guide, local authorities will be eligible for reimbursement of cost categories as follows:

  • 100% of “direct response” costs (these are costs associated with caring for displaced people)
  • 60% of “other response” costs (temporary repairs to essential infrastructure and precautionary measures to reduce immediate damage), and
  • 60% of “recovery” costs (these relate to restoration of local authority essential infrastructure (fresh water, storm water and waste water) and river management systems, where there is major community disruption or continuing risk to life).

For the second and third categories above, reimbursement is above an individualised threshold based on the capital value of the affected district or region (ie, an excess applies).

For details relating to reimbursements under the Guide as result of the Canterbury earthquakes refer to note 30: Canterbury Earthquakes and the earthquake section in contingent liabilities (page 143).

Contact Energy Limited

The Crown and Contact Energy signed a number of documents to settle in full Contact's outstanding land rights and geothermal asset rights at Wairakei. Those 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.

Deposit Guarantee Schemes

The Government operates an opt-in Retail Deposit Guarantee Scheme for financial institution deposits. On 12 October 2010 the original retail deposit guarantee scheme expired. The Extended Retail Deposit Guarantee Scheme commenced on 12 October 2010, immediately upon expiry of the previous scheme and will expire on 31 December 2011. The extended scheme has tightened eligibility criteria and additional limitations on coverage of the scheme. The Crown guarantee is limited to those entities participating in the extended scheme and excludes deposits accepted by participating entities without the benefit of the guarantee.

As at 30 June 2011 four financial institutions were actively participating in the extended scheme with deposits totalling $1.5 billion covered by the guarantee. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of these financial institutions in the event the guarantee is called upon. The Crown assesses the risk of default by the entities participating in the extended scheme to be unlikely and therefore as at 30 June 2011 no provision is considered necessary in relation to the amount guaranteed by the Crown under the extended guarantee.

As at 30 June 2011, nine entities guaranteed under the deposit guarantee scheme had been placed into receivership; eight of these entities were guaranteed under the original deposit guarantee scheme and one under the extended guarantee scheme. The Crown has met its obligations to depositors under the original scheme, the residual obligations under the extended scheme are recognised as liabilities, and its rights of recovery from the receivers are recognised as assets (see note 14: Receivables).

In addition to the retail deposit guarantee scheme, the Government operated an opt-in wholesale funding guarantee facility from November 2008 to April 2010. As at 30 June 2011, 24 guarantee certificates remain in place, and the value of wholesale securities guaranteed was $9.0 billion. No provision is made for losses under this scheme as the probability of loss is considered remote.

Electricity Corporation of New Zealand Limited (ECNZ)

The ECNZ Sale and Purchase Agreement provides for compensation to ECNZ for any tax, levy, or royalty imposed on ECNZ for the use of water or geothermal energy for plants in existence or under construction at the date of the Sale and Purchase Agreement. The Agreement also provides for compensation for any net costs to ECNZ arising from resumption of assets pursuant to the Treaty of Waitangi (State Enterprises) Act 1988.

The Deed of Assumption and Release between ECNZ, Contact Energy Limited and the Crown provides that the Crown is no longer liable to ECNZ in respect of those assets transferred to it from ECNZ. As a result of the split of ECNZ in 1999, Ministers have transferred the benefits of the Deed to ECNZ's successors - Meridian Energy Limited, Mighty River Power Limited and Genesis Power Limited.

Under the Transpower New Zealand Limited (Transpower) Sale and Purchase and Debt Assumption Agreements, the Crown has indemnified ECNZ for any losses resulting from changes in tax rules applicable to transactions listed in the Agreements. Additionally, the Crown has indemnified the directors and officers of ECNZ for any liability they may incur in their personal capacities as a result of the Transpower separation process.

Following the split of ECNZ in 1999 into three new companies, the Crown has indemnified ECNZ in relation to all ECNZ's pre-split liabilities, including:

  • existing debt and swap obligations
  • hedge contracts and obligations
  • any liabilities that arise out of the split itself.

Note 32: Contingent Liabilities and Contingent Assets (continued)

Genesis Energy - financial guarantees

Genesis has issued financial guarantees to the alliance contractor and other agents of the Kupe joint venture for the full and faithful performance of its subsidiaries in their capacities as joint venture partners, to the extent of their several liabilities under the development agreement.

Genesis issued a financial guarantee to NZX Limited for the full and faithful performance of its subsidiary Energy Online Limited, to the extent of its liabilities for its retail electricity purchases. This guarantee may give rise to liabilities in the Company if Energy Online Limited does not meet their obligations under the terms of the respective arrangements.

Genesis Energy - letters of credit and performance bonds

Genesis, as a participant in the electricity market, issued letters of credit to the Energy Clearing House Limited under the markets' security requirements. These letters of credit are issued as part of normal trading conditions and are to ensure there is no significant credit risk exposure to any one market participant.

Genesis has also issued letters of credit and performance bonds to certain suppliers and services providers under normal trading conditions. The liabilities covered by these arrangements are already provided for in the statement of financial position, and therefore not expected to create any adverse effects on the financial results presented. These are not material to the financial statements.

Housing New Zealand Corporation (HNZC)

HNZC is liable to the owners (ANZ National Bank Limited and Ichthus Limited) of mortgages sold by HNZC during 1992 to 1999 for credit losses they may incur from specified limited aspects of their ownership of those mortgages with the Crown standing behind this obligation.

The Crown has provided a warranty in respect of title to the assets transferred to Housing New Zealand Limited (HNZL) (HNZL was incorporated into the HNZC group as a subsidiary in 2001 as part of a legislated consolidation of government housing functions) and has indemnified HNZL against any breach of this warranty. In addition, the Crown has indemnified HNZL against any third-party claims that are a result of acts or omissions prior to 1 November 1992. It has also indemnified the directors and officers of HNZL against any liability consequent upon the assets not complying with statutory requirements, provided it is taking steps to rectify any non-compliance.

Indemnities against acts of war and terrorism

The Crown has indemnified Air New Zealand against 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.

Justices of the Peace, Community Magistrates and Disputes Tribunal Referees

Section 197 of the Summary Proceedings Act 1957, requires the Crown to indemnify Justices of the Peace and Community Magistrates against 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.

Section 58 of the Disputes Tribunal Act 1988 confers a similar indemnity on Disputes Tribunal Referees.

Landcorp Farming Limited

The Protected Land Agreement provides that the Crown will pay Landcorp any accumulated capital costs and accumulated losses or Landcorp will pay the Crown any accumulated profit, attributed to a Protected Land property that is required to be transferred to the Crown or that the Crown releases for sale. The Crown will also be liable to pay Landcorp, at the time of sale or transfer of any property deemed to be Protected Land, the amount of any outstanding equity payments on the initial value of the property.

Maui Partners

The Crown has entered into confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information. The deed contains an indemnity against any losses arising from a breach of the deed.

Meridian Energy - letters of credit and performance bonds

In addition to its borrowings, Meridian has entered into a number of letters of credit and performance guarantee arrangements which provide credit support of $89.4 million to support the collateral requirements of Meridian's trading business. Of the $89.4 million, $2.0 million expires in the 2012 financial year with the balance having no expiry date. Meridian indemnifies the obligations of the bank in respect of the letters of credit and performance guarantees issued by the bank to counterparties of Meridian.

National Provident Fund

The National Provident Fund (NPF) has been indemnified for certain potential tax liabilities. Under the NPF Restructuring Act 1990, the Crown guarantees:

  • the benefits payable by all NPF schemes (section 60)
  • investments and interest thereon deposited with the NPF Board prior to 1 April 1991 (section 61)
  • payment to certain NPF defined contribution schemes where application of the 4% minimum earnings rate causes any deficiency or increased deficiencies in reserves to arise (section 72).

A provision has been made in these financial statements in respect of the actuarially assessed unfunded liability in the DBP Annuitants' Scheme (refer to note 27).

New Zealand Railways Corporation

The Crown has indemnified the directors of NZ Railways Corporation against any liability arising from the surrender of the licence and lease of the Auckland rail corridor.

The Crown has further indemnified the directors of NZ Railways Corporation against all liabilities in connection with the Corporation taking ownership and/or responsibility for the national rail network and any associated assets and liabilities on 1 September 2004.

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.

Public Trust

Section 52 of the Public Trust Act 2001 provides for the Crown to meet any deficiency in the Public Trust's Common Fund in meeting lawful claims on the Fund. This is a permanent (legislated) liability. On 7 November 2008 the Minister of Finance guaranteed interest payable on estates whose money constitutes the Common Fund.

Reserve Bank of New Zealand

Section 21(2) of the Reserve Bank of NZ Act 1989 requires the Crown to pay the Reserve Bank the amount of any exchange losses incurred by the Bank as a result of dealing in foreign exchange under Sections 17 and 18 of the Act. This is a permanent (legislated) liability.

Synfuels-Waitara Outfall Indemnity

As part of the 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.

Tainui Corporation

Several leases of Tainui land at Huntly and Meremere have been transferred from ECNZ to Genesis Power. The Crown has provided guarantees to Tainui Corporation relating to Genesis Power's obligations under the lease agreements.

Note 32: Contingent Liabilities and Contingent Assets (continued)

Canterbury Earthquakes

Earthquake Commission (EQC)

The Crown is liable to meet any deficiency in the EQC's assets in meeting the Commission's financial liabilities (section 16 of the Earthquake Commission Act 1993). In the event of a major natural disaster the Crown may be called upon to meet any financial shortfall incurred by the Commission.

The estimate of EQC's liability at 30 June 2011, including the impact of Canterbury earthquakes are consolidated in these financial statements. EQC's estimates indicate that claims payments, net of reinsurance, may exceed its current level of assets by $1.157 billion. As EQC does not expect to immediately liquidate all its assets it will likely be able to meet its liabilities as they fall due over the next twelve months. In the event that EQC require additional funding from the Government, the Crown's net debt position would increase.

Land zones

On 23 June 2011 the Government announced zones of land damage in Christchurch and parts of the Waimakariri district. The land has been mapped into four zones:

  • red (land repair would be prolonged and uneconomic at present)
  • orange (further assessment required)
  • green (repair/rebuild process can begin), and
  • white (not yet mapped or not residential).

The Government also announced on the same day plans to purchase insured residential land in the red zone on a voluntary basis. A liability for the purchase of red zone properties has been recognised in these financial statements along with a receivable for the assignment of insurance rights in the property. Refer to note 27 for details.

No provision has been made in these financial statements for costs associated with the orange and white zones as no decision had been made at 30 June 2011 regarding any offer of purchase. Any offers made after 30 June but before these financial statements were published have been detailed in note 27.

Any offer to residents in the orange and white zones to purchase property will result in increase costs to the Crown. The extent of these costs will be dependent on the details of each offer.

Civil Defence Emergency Management - Canterbury Local Authorities

The Government has recorded a $133 million expense in these financial statements for reimbursements to Canterbury local authorities for response costs as a result of the Canterbury earthquakes.

No expense for the Government's obligation to reimburse local authorities for 60% of permanent repairs to essential infrastructure has been recorded in these financial statements. This is because the estimate is not sufficiently reliable to be recorded as a liability at this point. This unquantifiable liability relates to the restoration of essential infrastructure (fresh water, storm water and waste water) and river management systems in Canterbury and is referred to as ‘recovery costs' under Guide to the National Civil Defence Emergency Management and Plan (‘the Guide').

The Government has provided an indemnity under section 65ZG of the Public Finance Act 1989 which enables this reimbursement expense for permanent repairs to be incurred without further appropriation. The indemnity, in favour of the four affected Canterbury authorities (Christchurch City Council, Waimakariri District Council, Selwyn District Council and Environment Canterbury), formalises the explicit guarantee under the Guide.

For further details of this obligation, along with a possible range of the estimate refer to Note 30: Canterbury Earthquakes.

Properties acquired under the Canterbury Red Zone Support Package

As reported in Note 27, a provision has been made for the costs associated with Red Zone Support Package. As a consequence of this package, the Crown will acquire residential properties that are unlikely to be suitable for continued residential occupation for a prolonged period of time (red zone properties). As no determination has been made of the possible use of the properties the Crown will acquire, any value for the asset is contingent as at 30 June 2011.

Other Unquantifiable Contingent Liabilities

Abuse claims

There is ongoing legal action against the Crown in relation to historical abuse claims. At this stage the number of claimants and outcome of these cases are uncertain.

Accident Compensation Corporation (ACC) litigations

There are several legal actions against ACC in existence, arising in the main from challenges to operational decisions made by ACC. ACC will be vigorously defending these claims.

Air New Zealand litigation

Air New Zealand has been named in five class actions. One, in Australia, claims travel agents commission on fuel surcharges and two (one in Australia and the other in the United States) make allegations against more than 30 airlines, of anti competitive conduct in relation to pricing in the air cargo business. The other two class actions (in the United States and in Canada) allege that Air New Zealand together with many other airlines conspired in respect of fares and surcharges on trans-Pacific routes. All class actions are being defended.

The allegations made in relation to the air cargo business are also the subject of investigations or proceedings by regulators in New Zealand, Australia, the United States and the European Union. A formal Statement of Objections was issued by the European Commission in 2007 to 25 airlines including Air New Zealand. Air New Zealand has responded to this Statement of Objections. On 15 December 2008 the New Zealand Commerce Commission filed proceedings against 13 airlines including Air New Zealand alleging breaches of the Commerce Act 1986. On 17 May 2011 the Australian Competition and Consumer Commission filed proceedings alleging breaches of the (Australian) Trade Practices Act 1974.

Air New Zealand litigation(continued)

A formal Statement of Objection relating to alleged conduct in the air cargo business was issued by the European Commission in 2007 to 25 airlines including Air New Zealand. Air New Zealand responded to this Statement of Objection and on 9 November 2010 the European Commission advised that it had closed its file in relation to Air New Zealand, following consideration of the responses. The Company has not paid a fine nor incurred any penalty in relation to the European Commission investigation.

On July 2011 Air New Zealand received a letter from the US Department of Justice confirming, in relation to the Air Cargo Investigation, that “Air New Zealand is no longer a subject or target of the ongoing grand jury investigation”. Air New Zealand has paid no fine nor incurred any penalty in relation to the US Department of Justice Air Cargo Investigation.

Air New Zealand is defending the remaining proceedings. In the event that a court determined, or it was agreed with a regulator, that Air New Zealand had breached relevant laws, the Company would have potential liability for pecuniary penalties and to third party damages under the laws of the relevant jurisdictions.

Environmental liabilities

Under common law and various statutes, the Crown may have responsibility to remedy adverse effects on the environment arising from Crown activities.

Departments managing significant Crown properties have implemented systems to identify, monitor and assess potential contaminated sites.

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

Family caregivers

The Human Rights Tribunal has declared that the Ministry of Health's policy of not employing family members to provide care to disabled relatives is in breach of section 19 of the New Zealand Bill of Rights Act 1990. The High Court has found in favour of the family caregivers. Leave has been granted to appeal to the Court of Appeal.

Kordia Group Limited

As part of its contractual obligations with clients, Kordia Limited has an undertaking to provide services at a certain level and should this not be achieved, Kordia Limited may be liable for contract penalties. It is not possible to quantify what these may be until an event has occurred. The Company does not expect any liabilities to occur as a result of these contractual obligations.

The Company makes advances to its subsidiary companies. The Company's loan facility comprises a syndicated revolving cash advance facility between three banks, committed to a maximum amount of $110 million (2010: $120 million). The facility is supported by a negative pledge by the Company and its guaranteeing subsidiaries over their assets and undertakings. Under the negative pledge, each guaranteeing subsidiary may be liable for indebtedness incurred by the Company and other guaranteeing subsidiaries. The Company considers the negative pledge to be an insurance contract. Such contracts and cross guarantees are treated as a contingent liability and only recognised as a liability if a payment is probable.

Maui Contracts

Contracts in respect of which the Crown purchases gas from Maui Mining companies and sells gas downstream to Contact Energy Limited, Vector Gas Limited and Methanex Waitara Valley Limited provide for invoices to be re-opened in certain circumstances within two years of their issue date as a result of revisions to indices. These revisions may result in the Crown refunding monies or receiving monies from those parties.

Note 32: Contingent Liabilities and Contingent Assets (continued)

Rugby World Cup 2011

The Crown has agreed in joint venture arrangements with the New Zealand Rugby Union to an uncapped underwrite of the costs of hosting the 2011 Rugby World Cup, on a loss sharing basis (Crown 67%, NZRU 33%). A provision for the forecast losses has been made in the Government's financial statements.

The Crown has agreed to reimburse New Zealand income tax that might be incurred by the joint venture entity (Rugby New Zealand 2011 Limited) or the NZRU in relation to the joint venture entity, and has also agreed to reimburse the NZRU for New Zealand withholding tax that might be incurred on certain payments made in relation to the tournament.

Television New Zealand

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

The Government has announced that analogue television transmission will cease by November 2013. The Company has an obligation to decommission its analogue transmitters which are located on Kordia Limited's transmission sites. The decommissioning of analogue transmitters will be undertaken as a broadcasting industry initiative and the Company's share of the cost of decommissioning, net of any amounts recovered from disposal, cannot be reliably estimated.

Treaty of Waitangi claims

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

On occasion Maori claimants pursue the resolution of particular claims against the Crown through higher courts. There is currently one such action against the Crown being heard at the High Court. Failure to successfully defend such actions may result in liability for historical Treaty grievances in excess of that currently anticipated.

Treaty of Waitangi claims - settlement relativity payments

The Deeds of Settlement negotiated with Waikato-Tainui and Ngai Tahu include a relativity mechanism. The mechanism provides that, where the total redress amount for all historical Treaty settlements exceeds $1 billion in 1994 present-value terms, the Crown is liable to make payments to maintain the real value of Ngai 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 Ngai Tahu.

In future years, additional costs may be incurred in accordance with the relativity mechanism as Treaty Settlements are reached; however no value can be placed on these at this point in time as there is uncertainty as to when each negotiation will settle, and the value of any settlement when reached.

Westpac New Zealand Limited

Under the Supplier Payments Service - New Zealand Government Master Agreement dated 23 June 2011, the Crown indemnified Westpac New Zealand Limited against certain costs, damages and losses to third parties resulting from unauthorised, forged or fraudulent payment instructions (excluding costs, damages and losses arising from Westpac's wilful default, negligence or breach of the agreement or other applicable legal obligation).

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

  • In relation to letters of credit issued on behalf of the Crown.
  • For costs and expenses incurred by reason of third party claims against Westpac relating to indirect instructions, direct debits, third party cheques, departmental credit card merchant agreements, use of online banking products and IRD processing arrangements.
 
  Actual
  30 June 2011
$m
30 June 2010
$m

Quantifiable Contingent Assets

   
Suspensory loans to integrated schools 53 61
Legal proceedings and disputes 636 504
Other contingent assets 15 7
Total quantifiable contingent assets 704 572

Quantifiable Contingent Assets

   
Core Crown 702 570
Crown entities 2 2
State-owned enterprises - -
Inter-segment eliminations - -
Total quantifiable contingent assets 704 572

Ministry of Education - suspensory loans

Suspensory loans issued by the Ministry of Education to integrated schools.

$53 million at 30 June 2011 (2010: $61 million)

Legal proceedings and tax disputes

Legal proceedings and tax disputes are contingent assets in relation to Inland Revenue pending assessments. Contingent assets arise where Inland Revenue has advised a taxpayer of a proposed adjustment to their tax assessment. There has been no amended assessment issued at this point or revenue recognised so these are recorded in the note 32 as legal proceedings and disputes – non-assessed. The taxpayer has the right to dispute this adjustment and a disputes resolution process is entered into. Inland Revenue quantifies a contingent asset based on the likely outcome of the disputes process based on experience and similar prior cases.

$636 million at 30 June 2011 (2010: $504 million)

Note 33: Financial Instruments

The Government has devolved responsibility for the financial management of its financial portfolios to its sub-entities such as NZDMO, Reserve Bank, NZS Fund, Inland Revenue and ACC. The financial management objectives of each of these portfolios are influenced by the purpose and associated governance framework for which the portfolio is held. The purposes of a portfolio may cover:

  • public policy considerations eg, the provision of student loans to support tertiary education policy
  • liquidity management eg, Treasury bills and Government stock are the primary debt instruments for funding core Government operations, and
  • long-term economic return eg, the function of the NZ Superannuation Fund.

These purposes are not mutually exclusive, with portfolios typically established for, or arising from, a public policy objective, such as pre-funding future superannuation expenses, but in doing so are managed to maximise economic returns consistent with the policy objective.

Reporting to Ministers on these portfolios is done on a portfolio-by-portfolio basis. The institutional frameworks and policy objectives of these portfolios are reviewed periodically. Otherwise, reporting on the consolidated financial management and performance of these portfolios is done in the context of the interim and annual Financial Statements of the Government and the forecasts reported in the Half-Year and Budget Economic and Fiscal Updates.

Details of the significant accounting policies and methods adopted including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability, are disclosed in Note 1 to the financial statements.

(a) Analysis of financial instruments

Financial instruments are measured at either fair value or amortised cost. Changes in the value of an instrument may be reported in the operating balance or directly in net worth depending on its designation. The following table details the value of financial assets and financial liabilities by class of instrument and by designation category, as defined in the accounting policies in Note 1.

Financial Assets
Financial assets as at 30 June 2011   Designation
  Note Amortised
cost
Available
for sale
Held for
trading
Fair value
through P&L
Total
    $m $m $m $m $m
Cash and cash equivalents   9,801 - - - 9,801
Trade and other receivables 14 9,927 - - - 9,927
Long-term deposits 15 2,099 - - 160 2,259
Derivatives in gain 15 - - 5,415 - 5,415
Marketable securities 15 - 547 328 38,339 39,214
IMF financial assets 15 2,168 - - - 2,168
Share investments 16 30 73 - 14,145 14,248
Student loans 17 7,460 - - - 7,460
Kiwibank mortgages 17 11,047 - - 448 11,495
Other advances 17 1,367 46 - 199 1,612
Total financial assets   43,899 666 5,743 53,291 103,599
Financial Assets (continued)
Financial assets as at 30 June 2010   Designation
  Note Amortised
cost
Available
for sale
Held for
trading
Fair value
through P&L
Total
    $m $m $m $m $m
Cash and cash equivalents   7,774 - - - 7,774
Trade and other receivables 14 2,999 - - - 2,999
Long-term deposits 15 2,290 - - 494 2,784
Derivatives in gain 15 - - 2,972 - 2,972
Marketable securities 15 - 331 490 34,911 35,732
IMF financial assets 15 2,199 - - - 2,199
Share investments 16 25 73 - 12,081 12,179
Student loans 17 6,790 - - - 6,790
Kiwibank mortgages 17 9,183 - - 1,236 10,419
Other advances 17 1,011 42 - 185 1,238
Total financial assets   32,271 446 3,462 48,907 85,086

As at 30 June 2011, the carrying value of financial assets that had been pledged as collateral was $1,100 million (2010: $1,073 million). These transactions are conducted under terms that are usual and customary to standard securities borrowing.

Financial Liabilities
Financial liabilities as at 30 June 2011   Designation
  Note Amortised
cost
Held for
trading
Fair value
through P&L
Total
    $m $m $m $m
Issued currency   4,254 - - 4,254
Accounts payable 23 7,337 - - 7,337
Borrowings: 24        
Government stock   42,971 - 3,047 46,018
Treasury bills   6,605 - 423 7,028
Government retail stock   261 - - 261
Settlement deposits with Reserve Bank   - - 6,276 6,276
Derivatives in loss   - 2,767 - 2,767
Finance lease liabilities   1,176 - - 1,176
Other borrowings   20,999 209 5,511 26,719
Total borrowings   72,012 2,976 15,257 90,245
Total financial liabilities   83,603 2,976 15,257 101,836
Financial Liabilities (continued)
Financial liabilities as at 30 June 2010   Designation
  Note Amortised
cost
Held for
trading
Fair value
through P&L
Total
    $m $m $m $m
Issued currency   4,020 - - 4,020
Accounts payable 23 6,703 - - 6,703
Borrowings: 24        
Government stock   26,814 - 1,112 27,926
Treasury bills   6,821 - 804 7,625
Government retail stock   309 - - 309
Settlement deposits with Reserve Bank   - - 6,679 6,679
Derivatives in loss   - 2,376 - 2,376
Finance lease liabilities   920 - - 920
Other borrowings   18,587 208 5,103 23,898
Total borrowings   53,451 2,584 13,698 69,733
Total financial liabilities   64,174 2,584 13,698 80,456

(a) Analysis of financial instruments (continued)

Fair Value Hierarchy

The following table details the basis for the valuation of financial assets and financial liabilities measured at fair value:

Fair Value Hierarchy
As at 30 June 2011 Quoted
market
price
Observable
markets
Significant
non-observable
inputs
Total
  $m $m $m $m

Financial assets

       
Long-term deposits - 160 - 160
Derivatives in gain 1 5,213 201 5,415
Marketable securities 10,693 27,351 1,170 39,214
Share investments 13,701 38 479 14,218
Kiwibank mortgages - - 448 448
Other advances - 200 45 245
Total financial assets at fair value 24,395 32,962 2,343 59,700

Financial liabilities

       
Government stock 3,047 - - 3,047
Treasury bills - 423 - 423
Government retail stock - - - -
Settlement deposits with Reserve Bank 6,276 - - 6,276
Derivatives in loss 1 2,478 288 2,767
Other borrowings 622 5,098 - 5,720
Total financial liabilities at fair value 9,946 7,999 288 18,233
Fair Value Hierarchy (continued)
As at 30 June 2010 Quoted
market
price
Observable
markets
Significant
non-observable
inputs
Total
  $m $m $m $m

Financial assets

       
Long-term deposits - 494 - 494
Derivatives in gain - 2,765 207 2,972
Marketable securities 13,144 21,434 1,154 35,732
Share investments 12,010 32 112 12,154
Kiwibank mortgages - - 1,236 1,236
Other advances - 187 40 227
Total financial assets at fair value 25,154 24,912 2,749 52,815

Financial liabilities

       
Government stock 1,112 - - 1,112
Treasury bills - 804 - 804
Government retail stock - - - -
Settlement deposits with Reserve Bank 6,679 - - 6,679
Derivatives in loss 1 2,137 238 2,376
Other borrowings 740 4,571 - 5,311
Total financial liabilities at fair value 8,532 7,512 238 16,282

Note 33: Financial Instruments (continued)

(a) Analysis of financial instruments (continued)

Fair Value Movements

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

Fair Value Movements
As at 30 June 2011 Marketable
securities
Share
investments
Kiwibank
mortgages
Other
advances
Derivatives
in gain/(loss)
Total
  $m $m $m $m $m $m
Opening balance 1,154 112 1,236 40 (31) 2,511
Total gains/(losses) recognised in the
statement of financial performance
14 349 (13) - (14) 336
Total gains/(losses) recognised in the
statement of comprehensive income
(1) - - 2 (19) (18)
Purchases 344 44 - - - 388
Sales (130) (10) - - (13) (153)
Issues - - - 4 - 4
Settlements (211) (6) (775) (1) (10) (1,003)
Transfers - (10) - - - (10)
Closing balance 1,170 479 448 45 (87) 2,055
Fair Value Movements (continued)
As at 30 June 2010 Marketable
securities
Share
investments
Kiwibank
mortgages
Other
advances
Derivatives
in gain/(loss)
Total
  $m $m $m $m $m $m
Opening balance 1,257 119 2,122 - (65) 3,433
Total gains/(losses) recognised in the
statement of financial performance
(13) (11) - - 91 67
Total gains/(losses) recognised in the
statement of comprehensive income
4 - (42) (2) (78) (118)
Purchases 1,183 30 - - 8 1,221
Sales (273) (22) - - (2) (297)
Issues - - - 2 - 2
Settlements (959) (1) (844) - 15 (1,789)
Transfers (45) (3) - 40 - (8)
Closing balance 1,154 112 1,236 40 (31) 2,511

Total gains/(losses) included in the statement of financial performance in relation to financial assets held at 30 June 2011:

Fair Value Movements
  Marketable
securities
Share
investments
Kiwibank
mortgages
Other
advances
Derivatives
in gain/(loss)
Total
  $m $m $m $m $m $m
Gains/(losses) 5 340 - - (9) 336

Total gains/(losses) included in the statement of financial performance in relation to financial assets held at 30 June 2010:

Fair Value Movements
  Marketable
securities
Share
investments
Kiwibank
mortgages
Other
advances
Derivatives
in gain/(loss)
Total
  $m $m $m $m $m $m
Gains/(losses) (38) (14) - - 24 (28)

Derivatives

Derivatives
Derivatives as at 30 June 2011 Carrying
value in
gain
Notional
value in
gain
Carrying
value in
loss
Notional
value in
loss
Net
carrying
value
  $m $m $m $m $m
Foreign exchange contracts 1,268 23,658 475 12,766 793
Foreign exchange options 28 206 - 125 28
Cross currency swaps 2,831 19,272 705 6,481 2,126
Interest rate swaps 775 11,563 809 15,784 (34)
Interest rate options 1 85 9 190 (8)
Futures 4 1,632 1 1,227 3
Other derivatives 508 10,902 768 16,775 (260)
Total derivatives 5,415 67,318 2,767 53,348 2,648
Derivatives (continued)
Derivatives as at 30 June 2010 Carrying
value in
gain
Notional
value in
gain
Carrying
value in
loss
Notional
value in
loss
Net
carrying
value
  $m $m $m $m $m
Foreign exchange contracts 573 12,981 536 13,900 37
Foreign exchange options 11 265 - 10 11
Cross currency swaps 1,217 10,766 619 8,404 598
Interest rate swaps 903 10,923 705 16,826 198
Interest rate options 1 145 11 267 (10)
Futures - 986 6 1,406 (6)
Other derivatives 267 3,689 499 10,306 (232)
Total derivatives 2,972 39,755 2,376 51,119 596

Hedge Derivatives

Some derivatives are reported using the hedge accounting approaches available under financial reporting standards. Changes in the fair value of hedging instruments designated as cash flow hedges are accumulated within equity and to the extent that the hedges are deemed effective. To the extent that the hedges are ineffective for accounting, changes in fair value are recognised in the statement of financial performance. A fair value hedge enables the hedged item to be adjusted by the effective portion of the fair value hedge and for this adjustment to be reported in the statement of financial performance.

The carrying values of hedge accounted derivatives were:

Hedge Derivatives
  Carrying
value in
gain
Carrying
value in
loss
Net
carrying
value
  $m $m $m

Hedge accounted derivatives as at 30 June 2011

     
Derivatives hedging fair value 16 89 (73)
Derivatives hedging cash flows 162 556 (394)

Hedge accounted derivatives as at 30 June 2010

     
Derivatives hedging fair value 81 43 38
Derivatives hedging cash flows 182 259 (77)

As a result of fair value hedge accounting, the hedged items were adjusted by a gain of $81 million (2010: loss of $35 million), which is included in the statement of financial performance along with the change in fair value of the hedging derivative.

The periods when cash flows are expected to occur from activities subject to cash flow hedge accounting and when they are expected to effect the operating balance are:

Hedge Derivatives (continued)
    1-2 years 2-5 years >5 years Total
  $m $m $m $m $m

As at 30 June 2011

         
Timing of cash flows (43) (4) (1) 4 (44)
Effect on operating balance (12) (8) (19) (138) (177)

As at 30 June 2010

         
Timing of cash flows (18) 10 11 1 4
Effect on operating balance 19 15 15 (122) (73)

Note 33: Financial Instruments (continued)

(b) Risk management policies

Risk management policies are outlined for entities that hold significant portfolios of financial instruments. The size of these portfolios on an unconsolidated basis (ie, including cross-holdings of Government stock and other Crown instruments) are:

Note 33: Financial Instruments (continued)
  30 June 2011 30 June 2010
 

Unconsolidated
financial
assets
$m

Unconsolidated
financial
 liabilities
$m

Unconsolidated
financial
assets
$m

Unconsolidated
financial
liabilities
$m

New Zealand Debt Management Office (NZDMO) 26,104 72,331 19,634 52,292
Reserve Bank 17,909 15,267 19,265 16,482
Inland Revenue Department 7,791 234 7,086 213
NZ Superannuation Fund 18,687 855 15,552 1,022
ACC 18,396 1,490 13,676 376
NZ Post (including Kiwibank) 14,089 13,910 12,451 12,283
Air New Zealand 1,520 1,828 1,613 1,533
EQC 9,286 85 5,985 4
Transpower 460 2,415 395 1,891
Ministry of Social Development 991 451 860 403
Mighty River Power 474 1,544 467 1,392
Meridian Energy 672 2,050 445 2,028
Genesis Energy 286 1,523 270 804
Public Trust 895 879 910 895
AMI Insurance 2,199 33 n/a n/a

The risk management policies applied by each of these entities are outlined below.

Note 33: Financial Instruments (continued)
Manager Financial Instrument Portfolio Risk Management
NZDMO

Financial assets and liabilities held to:

  • finance the Government's gross borrowing requirements
  • provide funds to Government entities, and
  • provide capital market services and derivative transactions to Government entities.
NZDMO operates within a risk management framework that is approved by the Minister of Finance. The framework specifies NZDMO's policies for managing market risk, credit risk, liquidity risk, funding risk and operational risk. The risk management framework is subject to continuous improvement.
The Reserve Bank of New Zealand Financial assets and liabilities held for the purpose of effective foreign exchange intervention capability, wholesale banking liquidity and circulating currency. The main financial risks to which the Bank is exposed include credit risk, foreign currency risk, interest rate risk and liquidity risk. The overall risk management framework is designed to strongly encourage the sound and prudent management of the Bank's risks.
Inland Revenue Department Student Loans Risk is minimised by the collection of compulsory repayments from NZ-based borrowers through the tax system. In addition, advances are widely dispersed, reducing the concentration of credit risk.
The New Zealand Superannuation Fund (NZS Fund) Investment Fund assets

The Guardians manage the NZS Fund's risks by adopting an appropriate risk profile that is commensurate with the return objective and time horizon of the Fund. The objective is to:

  • avoid concentration of risk by ensuring there is adequate diversification between and within asset classes and geographically
  • carefully select and monitor managers to ensure the Guardians have sufficient conviction that each manager will maximise the probability that return expectations will be met
  • ensure that there are no unintended biases away from the intended investment strategy, and
  • perform rigorous measurement and management of market and manager risk.
Accident Compensation Corporation ACC Reserves The investment committee sets investment guidelines by requiring investment portfolio managers to manage their portfolios within defined market exposure limits.  These limits include limits on percentage weight of any particular company in the portfolio relative to its benchmark weight; limits on aggregate investment companies not represented in the benchmark; limits on the maximum investment in any individual company; duration limits relative to the duration of the benchmark; and maximum credit exposure to single entities. Compliance with the investment guidelines is reviewed by the internal auditors on a half-yearly basis.
New Zealand Post (including Kiwibank) Financial instruments from its debt portfolio and investment activity. This includes activities as a financial intermediary and financial market participant. The Board is responsible for risk management policies and procedures. This includes appointing a finance risk and investment committee to monitor risk management. In addition, the Asset-Liability Committee, the Credit Committee and Project Governance Board have been formed to ensure bank-wide input and appropriate focus on specific risk matters.
Air New Zealand Financial instruments arising from its business activity. The Board of directors approve risk management policies. Compliance with these policies is reviewed and reported monthly to the Board and is included as part of the internal audit programme. Group policy is not to enter, issue, or hold financial instruments for speculative purposes.
Earthquake Commission Assets in National Disaster Fund The Commission applies best-practice portfolio management that maximises return without undue risk to the Fund as a whole while avoiding prejudice to New Zealand's reputation as a responsible member of the world community.
Transpower Financial instruments arising from its business activity The Board has approved policy and guidelines and authorised the use of various financial instruments. The policy adopted by the Board prohibits the use of financial instruments for speculative purposes. All derivatives must be directly related to underlying physical debt or firm capital commitments on Board approved projects.
Ministry of Social Development Student loans The Ministry has a series of policies to manage the risks associated with financial instruments. These policies do not allow any transactions that are speculative in nature to be entered into.
Mighty River Power Financial instruments arising from its business activity The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to proactively manage these risks with the aim of protecting shareholder wealth. The Group uses financial instruments to hedge these risk exposures.
Meridian Energy Financial instruments arising from its business activity Meridian's overall risk management programme focuses on the unpredictability of financial markets and the electricity spot price and seeks to minimise potential adverse effects on the financial performance and economic value of the Group. The Group uses financial instruments to hedge these risk exposures.
Genesis Energy

Financial instruments arising from its business activity including:

  • Interest rate swaps
  • Foreign currency swaps and options
  • Electricity swaps and options
  • Oil price swaps and options.
The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise financial risk to the Group. Trading in financial instruments, including derivatives, for speculative purposes is not permitted by the Board.
Public Trust Financial assets and liabilities A Risk Assurance and Audit Committee is responsible for ensuring that adequate internal and risk management controls are in place. In addition an Investment Committee reviews the investment policies, procedures, practices and investment performance.
AMI Insurance Financial assets The company's risk management framework recognises the unpredictability of financial markets and seeks to minimise potential adverse effects on financial performance. The key objective of the company's financial risk management activities is to ensure sufficient liquidity is maintained at all times to meet obligations, particularly insurance liabilities and also to optimise investment returns for members.

 

Note 33: Financial Instruments (continued)

(c) Market risk

The Government's activities expose it primarily to the financial risks of changes in interest rates, foreign exchange rates and equity markets. These risks are managed at portfolio level consistent with the policy purpose of the portfolio and risk management objectives. Detailed information on the exposure to market risk and policies for managing this risk are available in the separate financial statements prepared by the Manager for each portfolio.

The Government's exposure to market risk reflects the combination of these portfolio management practices. These practices include use of Value-at-Risk (VaR) limits and stop-loss limits to manage risk. While NZDMO and Reserve Bank's activities collectively manage the core Crown's exposure to foreign exchange, there is no other centralised management of market or other risk.

There has been no change to the manner in which the Government reporting entities that manage the Government's portfolios, manage and measure risks from previous year.

A variety of derivative financial instruments are used across the portfolios to manage exposure to interest rate, foreign currency and electricity sector risk including:

  • foreign exchange contracts and options to hedge exchange rate risk arising from foreign investments and liabilities as well as budgeted overseas purchases. Under foreign exchange contracts the Government agrees to exchange one currency for another at a future date using an exchange rate determined when the contract is entered into
  • interest rate swaps and options to manage interest rate risk. Under interest rate swap contracts, the Government agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Government to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt and the cash flow exposures on the issued variable rate debt
  • cross currency swaps combine an interest rate swap and a currency swap whereby the interest rate in one currency is fixed, and the interest rate in the other is floating. In doing so, they manage both interest rate and currency risk, and
  • electricity derivatives are typically “contracts for differences” entered into by the electricity generation State-owned enterprises to hedge against volatility in electricity prices.

Interest rate risk management

The Government is exposed to interest rate risk as entities in the government borrow and invest funds at both fixed and floating interest rates. The risk is managed at the entity level in accordance with their capital objectives and risk management policies. These objectives and policies include maintaining an appropriate mix between fixed and floating rate borrowings, by the use of interest rate swap contracts and forward interest rate contracts, and by the use of Value-at-Risk and stop-loss limits. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite; ensuring optimal hedging strategies are applied, by either positioning the balance sheet or protecting interest expense through different interest rate cycles.

Interest rate sensitivity analysis

The following analysis of financial instruments shows how the operating balance and equity reserves would have been affected by a 100 basis point increase or decrease in New Zealand interest rates while holding all other variables constant. The effect on the operating balance is primarily from changes in interest revenue and interest expense on floating rate instruments and changes in the value of instruments measured at fair value through profit and loss. The Government does not have material exposure to foreign interest rates.

The sensitivity analysis below has been determined based on the exposure to interest rates for both derivatives and non-derivative financial instruments at the balance sheet date. The effect of exposure to interest rates on the valuation of non-financial instruments, such as the ACC liability and GSF defined benefit plan, are provided in the relevant notes to the financial statements.

Movements in interest rates affect the financial results of the Government in the following manner:

  • the resulting valuation changes for fixed interest instruments that are measured at fair value through profit and loss will affect the operating balance, while the valuation changes of fixed interest instruments designated as available-for-sale will affect equity reserves
  • the resulting changes in interest expense and interest revenue on floating rate instruments will affect the operating balance, and
  • where derivatives are designated as cash flow hedges of floating rate instruments, equity reserves will be affected by the resulting changes in the fair value of these derivatives.

If interest rates had been 100 basis points higher/(lower) at balance date and all other variables were held constant, the effect of financial instruments would increase/(decrease) the Government's financial results as outlined in the following table. The impact is net of any hedging by way of interest rate derivatives.

 
Change in New Zealand Interest Rates Impact on operating balance Impact on net worth
  2011
$m
2010
$m
2011
$m
2010
$m
Increase 1% (100 basis points) (716) (471) (623) (453)
Decrease 1% (100 basis points) 768 515 682 487

The Government's sensitivity to interest rates has increased primarily as a result of an increase in net debt during the year.

Note 33: Financial Instruments (continued)

(c) Market risk (continued)

Foreign currency risk management

The Government undertakes transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forwardforeign exchange contracts. The carrying amounts of the Government’s foreign currency denominated financialassets and financial liabilities translated to NZD at the reporting date are as follows:

Foreign currency risk management
As at 30 June 2011 Note NZD USD Yen Euro Other Total
    NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m
Cash and cash equivalents   5,636 3,460 61 262 382 9,801
Trade and other receivables 14 8,518 1,220 6 24 159 9,927
Long-term deposits 15 2,082 39 2 14 122 2,259
Derivatives in gain 15 37,208 (25,075) (692) (2,808) (3,218) 5,415
Marketable securities 15 9,526 20,696 1,174 4,671 3,147 39,214
IMF financial assets 15 - - - - 2,168 2,168
Share investments 16 3,604 2,836 560 1,024 6,224 14,248
Student loans 17 7,460 - - - - 7,460
Kiwibank mortgages 17 11,495 - - - - 11,495
Other advances 17 1,249 238 - - 125 1,612
Total financial assets   86,778 3,414 1,111 3,187 9,109 103,599
Issued currency   4,254 - - - - 4,254
Accounts payable 23 6,841 297 12 11 176 7,337
Borrowings: 24            
Government stock   46,018 - - - - 46,018
Treasury bills   7,028 - - - - 7,028
Government retail stock   261 - - - - 261
Settlement deposits with Reserve Bank   6,276 - - - - 6,276
Derivatives in loss   2,713 (5,481) 800 2,320 2,415 2,767
 Finance lease liabilities   708 468 - - - 1,176
Other borrowings   18,103 5,048 554 69 2,945 26,719
Total financial liabilities   92,202 332 1,366 2,400 5,536 101,836
Net financial currency holdings   (5,424) 3,082 (255) 787 3,573 1,763
Foreign currency risk management (continued)
As at 30 June 2010 Note NZD USD Yen Euro Other Total
    NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m
Cash and cash equivalents   4,193 2,942 151 171 317 7,774
Trade and other receivables 14 2,195 223 51 305 225 2,999
Long-term deposits 15 2,345 116 38 53 232 2,784
Derivatives in gain 15 18,004 (9,307) 360 (4,064) (2,021) 2,972
Marketable securities 15 6,679 22,289 1,339 3,868 1,557 35,732
IMF financial assets 15 - - - - 2,199 2,199
Share investments 16 2,744 2,883 585 791 5,176 12,179
Student loans 17 6,790 - - - - 6,790
Kiwibank mortgages 17 10,419 - - - - 10,419
Other advances 17 1,077 12 - - 149 1,238
Total financial assets   54,446 19,158 2,524 1,124 7,834 85,086
Issued currency   4,020 - - - - 4,020
Accounts payable 23 4,805 1,198 57 374 269 6,703
Borrowings: 24            
Government stock   27,926 - - - - 27,926
Treasury bills   7,625 - - - - 7,625
Government retail stock   309 - - - - 309
Settlement deposits with Reserve Bank   6,679 - - - - 6,679
Derivatives in loss   (13,649) 12,490 2,106 (30) 1,459 2,376
Finance lease liabilities   562 358 - - - 920
Other borrowings   16,533 3,743 437 10 3,175 23,898
Total financial liabilities   54,810 17,789 2,600 354 4,903 80,456
Net financial currency holdings   (364) 1,369 (76) 770 2,931 4,630

Foreign currency sensitivity analysis

The following table details the Government's sensitivity to a 10% strengthening and weakening in the New Zealand dollar with all other variables held constant. The sensitivity analysis includes outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates.

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.

Change in New Zealand exchange rate

Change in New Zealand exchange rate
  Impact on operating balance Impact on net worth
  2011
$m
2010
$m
2011
$m
2010
$m
Strengthen by 10% (176) 35 (99) 183
Weaken by 10% 147 (57) 64 (263)

The Government's sensitivity to foreign currency has increased during the current period mainly in relation to financial instrument portfolios held by the NZS Fund, Reserve Bank and ACC.

Equity market risk management

The Government is exposed to share price risks arising from its holding of share investments.

Equity market sensitivity analysis

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 below has been determined based on the exposure of the NZS Fund, ACC and EQC to share price risks at the reporting date. These three portfolios combined make up 98% of the Government's total share investments (2010: 98%).

Equity market sensitivity analysis
Change in share prices Impact on operating balance Impact on net worth
  2011
$m
2010
$m
2011
$m
2010
$m
Strengthen/weaken by 10% 1,390 1,198 1,390 1,198

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

Note 33: Financial Instruments (continued)

(d) Credit risk management

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 2011, the fair value of collateral held that could be sold or repurchased was $8,997 million (2010: $3,281 million).

Concentrations of credit exposure classified by credit rating, geography and industry of the counterparty areprovided in the following tables. The credit exposure of financial assets that are neither past due nor impaired is not materially different to the total credit exposure of the Government.

Concentration of credit exposure by credit rating (using the lower rating of Standard & Poor's or Moody's)

 
As at 30 June 2011 Note AAA AA A Other Non-rated Total
    $m $m $m $m $m $m
Cash and cash equivalents   3,621 6,114 34 23 9 9,801
Trade and other receivables 14 - - - - 9,927 9,927
Long-term deposits 15 43 1,913 282 21 - 2,259
Derivatives in gain 15 24 4,132 1,110 2 147 5,415
Marketable securities 15 25,803 6,426 1,297 1,191 4,497 39,214
IMF financial assets 15 - - - 2,168 - 2,168
Share investments 16 58 324 1,265 6,595 6,006 14,248
Student loans 17 - - - - 7,460 7,460
Kiwibank mortgages1 17 - - - - 11,495 11,495
Other advances 17 33 369 121 31 1,058 1,612
Total credit exposure by credit rating   29,582 19,278 4,109 10,031 40,599 103,599
 
As at 30 June 2010 Note AAA AA A Other Non-rated Total
    $m $m $m $m $m $m
Cash and cash equivalents   3,127 4,432 191 4 20 7,774
Trade and other receivables 14 - - - - 2,999 2,999
Long-term deposits 15 26 2,569 177 - 12 2,784
Derivatives in gain 15 4 1,998 843 2 125 2,972
Marketable securities 15 23,553 6,140 1,515 1,363 3,161 35,732
IMF financial assets 15 - - - 2,199 - 2,199
Share investments 16 57 300 1,081 5,275 5,466 12,179
Student loans 17 - - - - 6,790 6,790
Kiwibank mortgages1 17 - - - - 10,419 10,419
Other advances 17 - 174 107 - 957 1,238
Total credit exposure by credit rating   26,767 15,613 3,914 8,843 29,949 85,086

1. Kiwibank mortgages consist mainly of residential lending. Therefore these financial assets have been classified as non-rated for the purposes of credit risk.

Concentration of credit exposure by geographical area:

 
As at 30 June 2011 Note USA Europe Japan Australia New Zealand Other Total
    $m $m $m $m $m $m $m
Cash and cash equivalents   3,434 311 42 160 5,720 134 9,801
Trade and other receivables 14 - - - - 9,927 - 9,927
Long-term deposits 15 39 7 2 111 2,092 8 2,259
Derivatives in gain 15 633 1,101 - 785 2,816 80 5,415
Marketable securities 15 5,755 14,496 1,173 3,096 9,262 5,432 39,214
IMF financial assets 15 - - - - - 2,168 2,168
Share investments 16 3,252 2,791 657 2,118 3,539 1,891 14,248
Student loans1 17 - - - - 7,460 - 7,460
Kiwibank mortgages 17 - - - - 11,495 - 11,495
Other advances 17 77 101 - 120 1,314 - 1,612
Total credit exposure by geography   13,190 18,807 1,874 6,390 53,625 9,713 103,599
 
As at 30 June 2010 Note USA Europe Japan Australia New Zealand Other Total
    $m $m $m $m $m $m $m
Cash and cash equivalents   2,883 290 151 109 4,239 102 7,774
Trade and other receivables 14 - - - - 2,999 - 2,999
Long-term deposits 15 89 7 1 116 2,565 6 2,784
Derivatives in gain 15 526 595 - 242 1,597 12 2,972
Marketable securities 15 8,520 13,577 1,367 2,195 6,221 3,852 35,732
IMF financial assets 15 - - - - - 2,199 2,199
Share investments 16 3,411 2,287 737 1,782 2,667 1,295 12,179
Student loans1 17 - - - - 6,790 - 6,790
Kiwibank mortgages 17 - - - - 10,419 - 10,419
Other advances 17 12 107 - 41 1,077 1 1,238
Total credit exposure by geography   15,441 16,863 2,256 4,485 38,574 7,467 85,086

1. At 30 June 2011, 15% (2010: 14%) 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.

Concentration of credit exposure by industry:

 
As at 30 June 2011 Note Sovereign
issuers
Supra-
national
NZ banking
sector
Foreign
banking sector
Individuals Other Total
    $m $m $m $m