Prepared and furnished to the House of Representatives in accordance with Part III of the Public Finance Act 1989.

These are the first full financial statements prepared according to New Zealand International Financial Reporting Standards (NZ IFRS).

The Treasury has also prepared a summary version of these financial statements: Summary Financial Statements of the Government of New Zealand for the Year Ended 30 June 2008.

Contents

Browse section/chapter Download/Page range

Ministerial Statement

Statement of Responsibility

Commentary

Introduction
Summary
Fiscal Strategy
Revenue
Expenses
Surpluses
Cash Position
Debt
NZS Fund
Historical Financial Information

 

Report of the Auditor-General

 

Financial Statements

Statement of Financial Performance
Analysis of Expenses by Functional Classification
Statement of Cash Flows
Statement of Recognised Income and Expense
Statement of Financial Position

 

Notes to the Financial Statements

Supplementary Statements

 

Additional Financial Information

Fiscal Indicator Analysis

Information on State-owned Enterprises and Crown Entities
Government
Reporting Entity as at 30 June 2008
Crown entities

Fiscal Summary for the year ended 30 June 2008

Fiscal Summary for the year ended 30 June 2008
Forecast Fiscal Strategy Fiscal Indicators/Financial Statements Actual

Original
Budget
$ billion

Estimated
Actuals
$ billion

30 June
2008
$ billion

30 June
2007
$ billion

31.6% 31.5% Taxes… Taxation as % of GDP 31.5% 31.7%
54.7 56.7   Core Crown taxation 56.7 53.5
5.8 4.5 … combined with other revenue… Other Core Crown operating items 4.2 7.0
(56.1) (57.4) … fund core Crown expenses… Core Crown expenses (57.0) (54.0)
2.0 (1.2) … and with the results of entities
outside the budget process…
Net surpluses/(deficits) of
SOEs and Crown entities
(1.5) 1.5
6.4 2.6 … results in a surplus or deficit…

Operating balance

2.4 8.0
(1.4) 2.6 …part of which is gains or losses set
aside for fiscal strategy purposes…
Other (gains)/losses 3.2 (2.1)
5.0 5.2 … and so we have developed an operating
indicator excluding these items.

OBEGAL

5.6 5.9
(0.1) Some of this is income retained
that is not available for fiscal purposes
Net return on NZS Fund (excl. revaluations) (0.1) 0.4
(1.7) (0.6)   Net retained surpluses of
SOEs and Crown entities
(0.8) (1.7)
1.8 2.4 ... and some is income and expenses
not impacting cash
Non-cash items and working
capital movements
2.6 4.0
5.0 7.0 The operating cash flow that results, needs
to provide sufficient funds for

Core Crown Cash flow from Operations

7.3 8.6
(2.1) (2.1) ... building up assets in NZ Superannuation Contribution to NZS Fund (2.1) (2.0)
(1.8) (1.5) ... meeting the capital expenditure budget, and Purchase of physical assets (1.4) (1.8)
(2.1) (2.5) ... making advances (eg, to students and DHBs) Advances and capital injections (1.7) (2.0)
(1.0) 0.9 with a residual impact on debt
consistent with fiscal strategy

Residual Cash

2.1 2.8
-0.6% 0.5%

… and as a percentage of GDP

1.1% 1.7%

Summary Statement of Financial Performance for the year ended 30 June 2008

Summary Statement of Cash Flows for the year ended 30 June 2008
Forecast Actual

Original
Budget
$ billion

Estimated
Actuals
$ billion

30 June
2008
$ billion

30 June
2007
$ billion

Revenue

 
54.2 56.2 Taxation revenue 56.4 53.1
3.7 3.9 Other sovereign revenue 3.9 3.5
57.9 60.0

Total revenue levied through the Crown's sovereign power

60.3 56.6
13.3 13.7 Sales of goods and services 15.4 12.6
3.4 3.2 Interest revenue and dividends 3.2 3.0
2.4 2.9 Other revenue 2.6 2.4
19.0 19.8

Total revenue earned through operations

21.2 18.0
76.9 79.8

Total revenue (excluding gains)

81.5 74.6

Expenses

 
21.3 22.3 Social security and welfare 21.5 19.8
11.7 10.8 Health 10.8 10.0
10.3 10.8 Education 10.4 9.9
7.7 7.2 Transport and communications 7.4 6.9
17.9 20.7 Other functional expenses 22.6 19.2
2.7 3.0 Finance costs 3.1 2.9
0.3 (0.2) Forecasting adjustments
71.9 74.6

Total expenses (excluding losses)

75.8 68.7
5.0 5.2

Operating balance before gains and losses (OBEGAL)

5.6 5.9
1.4 (0.8) Net gains/(losses) on financial instruments (0.6) 1.6
(2.0) Net gains/(losses) on non-financial instruments (2.9) 0.5
1.4 (2.8)

Total gains/(losses)

(3.5) 2.1
0.1 0.2 Net surplus/(deficit) from associates and joint ventures 0.3 0.2
6.4 2.6

Operating balance from continuing activities

2.4 8.1
Gain/(loss) from discontinued operations (0.1)
6.4 2.6

Operating balance (including minority interest)

2.5 8.0
Operating balance attributable to minority interest in Air NZ (0.1)
6.4 2.6

Operating Balance

2.4 8.0
0.1 Total income/(expense) recognised directly in Net Worth 6.3 4.8
6.5 2.6

Total recognised income and expense

8.7 12.8

Summary Statement of Cash Flows for the year ended 30 June 2008

Summary Statement of Cash Flows for the year ended 30 June 2008
Forecast Actual

Original
Budget
$ billion

Estimated
Actuals
$ billion

30 June
2008
$ billion

30 June
2007
$ billion

Cash Flows From Operations

 

Cash was provided from

 
54.3 55.7 Taxation receipts 55.2 52.2
21.9 22.7 Other operating receipts 23.4 20.9

Cash was disbursed to

 
(19.5) (18.2) Social assistance and official development assistance (18.0) (16.3)
(44.4) (46.5) Personnel and operating payments (46.0) (41.9)
(2.5) (2.7) Interest payments (2.8) (2.4)
9.8 11.1

Net cash flows from operations

11.8 12.5

Cash Flows From Investing Activities

 

Cash was provided from

 
9.2 23.1 Sale of shares and other securities 26.2 20.0
1.4 2.5 Other capital receipts 1.7 2.6

Cash was disbursed to

 
(6.9) (6.2) Purchase of physical assets (5.3) (5.6)
(13.7) (28.0) Purchase of shares and other securities (32.3) (28.6)
(2.7) (3.3) Issue of advances (3.8) (2.9)
(0.3) (1.3) Purchase of other assets (0.8) (0.6)
(0.2) (0.7) Forecast adjustments
(13.2) (13.9)

Net cash flows from investing activities

(14.3) (15.0)
(3.4) (2.9)

Net cash flows from operating and investing activities

(2.6) (2.6)

Cash Flows From Financing Activities

 

Cash was provided from

 
0.2 0.3 Issues of circulating currency 0.1 0.1
3.9 3.3 Issue of  Government stock and treasury bills 2.8 2.9
2.2 2.7 Issue of other borrowing 3.4 8.5

Cash was disbursed to

 
(1.6) (1.0) Repayment of Government stock and treasury bills (1.1) (6.6)
(1.2) (1.3) Repayment of other borrowing (3.0) (1.8)
3.5 3.9

Net cash flows from financing activities

2.2 3.1
0.1 1.1

Net movement in cash

(0.4) 0.5
3.1 4.2 Opening Cash Balance 4.2 3.7
3.2 5.2

Closing Cash Balance

3.8

4.2

Summary Statement of Financial Position as at 30 June 2008

Summary Statement of Financial Position as at 30 June 2008
Forecast Actual

Original
Budget
$ billion

Estimated
Actuals
$ billion

30 June
2008
$ billion

30 June
2007
$ billion

Assets

 
3.2 5.2 Cash and cash equivalents 3.8 4.2
12.5 12.3 Receivables 14.2 12.1
35.1 36.4 Marketable securities, deposits and derivatives in gain 41.2 33.2
17.0 12.5 Share investments 13.0 13.6
12.8 13.9 Advances 12.9 10.7
96.0 98.4 Property, plant & equipment 103.3 95.6
10.7 11.6 Other assets 12.4 10.9
0.7 Forecast Adjustments
187.3 191.0

Total assets

200.8 180.3

Liabilities

 
3.7 3.7 Issued currency 3.5 3.4
9.0 8.4 Payables 10.9 8.1
0.8 1.0 Deferred revenue 1.3 1.0
46.4 45.5 Borrowings 46.1 41.9
19.0 20.8 Insurance liabilities 20.5 17.4
8.4 8.1 Retirement plan liabilities 8.3 7.2
3.9 4.0 Provisions 4.8 4.6
91.3 91.7

Total liabilities

95.3 83.5
96.1 99.4

Total assets less total liabilities

105.5 96.8

Net Worth

 
89.6 96.8 Net worth at start of year 96.8 84.0
6.4 2.6 Operating Balance excluding minority interest 2.4 8.0
0.1 Net revaluations and other movements 6.3 4.8
96.1 99.4

Total net worth

105.5 96.8

These summary financial statements comply with generally accepted accounting practice as it relates to summary financial statements.

The information in these summary statements is drawn from and is consistent with information presented in the full financial statements of the Government for the year ended 30 June 2008, which were the first NZ IFRS full financial statements. These were authorised for issue on 30 September 2008.

The Government is a public benefit entity and the full financial statements of the Government have been prepared in accordance with generally accepted accounting practice as it applies to such entities. The recognition and measurement disclosure changes resulting from the change to NZ IFRS were not significant in the context of this summary information. The full financial statements received an unqualified audit opinion.

These summary financial statements cannot be expected to provide as complete an understanding as provided by the full financial statements, which can be obtained from www.treasury.govt.nz/government/financialstatements/.

Ministerial Statement

Since 2000, New Zealand has enjoyed the longest uninterrupted period of economic expansion since World War II.

That growth, accompanied by a dramatic rise in employment, big fall in unemployment, strong increases in workers' wages and firms' profits, all assisted Crown revenue growth which in turn assisted the government to dramatically lift public investment in health, education, infrastructure and other public goods.

But just as important, the government has been utilising favourable economic conditions to position the Crown in a strong financial position to better withstand any future external shocks to our economy and society.

Since 1999, the government has driven gross sovereign-issued debt down, from over 35 percent of GDP to be nearer the government's long-term target of 20 percent of GDP, while simultaneously building up the financial assets of the New Zealand Superannuation Fund to part pre-fund future pension liabilities.

In 2006, the New Zealand Government's net financial asset position moved into positive territory for the first time in the nation's history, a position maintained in the 2007/08 financial statements for the year ended 30 June.

These statements are the first prepared under New Zealand International Financial Reporting Standards (NZ IFRS). The statements show an operating profit before gains and losses (OBEGAL) of $5,637 million, $410 million higher than forecast in the 2008 Budget Economic and Fiscal Update. The operating balance was on target at $2,384 million. This result compares with the previous year's operating balance of $8,022 million which included some large actuarial gains on the Government's long term liabilities while this year's result has been impacted by the decline in overseas equity markets.

Core Crown residual cash was $736 million less than in the previous year but $1,149 million higher than forecast. The delay in the $690 million KiwiRail purchase to 1 July drove most of this surplus with operating cash flows $274 million higher than forecast.

Gross sovereign-issued debt (excluding Reserve Bank settlement cash) continued to fall as a percentage of GDP at 17.4 percent in 2008 compared with 18.2 percent last year. This continues to be consistent with the Government's long term debt objective to keep gross sovereign-issued debt broadly stable at 20 percent of GDP over the next ten years.

As at 30 June 2008 the financial statements show that the Crown's net financial asset position inclusive of the assets of the New Zealand Superannuation Fund was equivalent to a positive 7.9 percent of GDP, compared with a positive 5.3 percent of GDP a year earlier.

The New Zealand Superannuation Fund grew by $1,239 million over the year to a net worth of $14,212 million. The Fund was adversely impacted by the downturn in overseas equity markets, making an $881 million operating loss for the year ended 30 June 2008. The Fund's annualised return since inception remains positive at 10.34% (over 3% above the risk free rate of return for the same period).

 

Hon Dr Michael Cullen
Minister of Finance

30 September 2008

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 generally accepted accounting practice.

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.

John Whitehead
Secretary to the Treasury

30 September 2008

 

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 2008 and its operations for the year ended on that date.

Hon Dr Michael Cullen
Minister of Finance

30 September 2008

Commentary

Introduction

This commentary outlines the key trends for each of the fiscal indicators along with a comparison to the forecasts provided in the 2008 Budget Economic and Fiscal Update. It should be read in conjunction with the financial statements on pages 24 to 157.

These are the first set of annual audited financial statements of the Government prepared in accordance with NZ IFRS. Comparative figures have been restated to align with NZ IFRS. Restated data prior to 30 June 2007 has not been subject to audit.

Each section in the commentary follows the components of the Government's fiscal strategy (outlined in the 2008 Fiscal Strategy Report - which is summarised on page 5):

  • Revenue (including taxes)
  • Expenses
  • Surpluses
  • Cash Position
  • Debt, and
  • The New Zealand Superannuation Fund (NZS Fund).

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 but excludes state-owned enterprises (SOEs) and Crown entities (CEs). Total Crown includes the core Crown, SOEs and CEs.

Summary

The key results were:

  • both the operating balance and OBEGAL for the year were in line with the 2008 Budget forecasts (after taking into account a reclassification of the ACC actuarial loss)
  • residual cash was $1,149 million higher than forecast for the year although this was essentially timing in nature (eg, the $690 million purchase of KiwiRail expected on 30 June took place on 1 July)
  • debt was also lower than forecast at year end, primarily driven by the higher than expected residual cash surplus and, as such, is also considered to be timing in nature, and
  • the NZS Fund recorded an operating deficit of $881 million for the year ended 30 June 2008 as a result of the downturn in equity markets (particularly the United States). The Fund's net worth at 30 June 2008 was $14,212 million.

Commentary (continued)

Fiscal Strategy

The Government's fiscal strategy (outlined in more detail in the 2008 Fiscal Strategy Report) is to strengthen its fiscal position so that it is well placed to respond to future challenges such as those associated with population ageing. The strategy is summarised in Figure 1.

The Government is implementing this strategy primarily by building up financial assets in the New Zealand Superannuation Fund (NZS Fund) and maintaining gross sovereign-issued debt at around 20% of GDP. In order to keep debt at around 20% of GDP, the Government has said it intends to run its cash flow position so that borrowing tracks in line with GDP over time. In practice, this means running operating surpluses, on average, that are sufficient to cover the contributions to the NZS Fund and some capital spending needs.

The Financial Statements of the Government provide a record of the Government's financial performance over financial year ended 30 June 2008 and its financial position as at 30 June 2008. They provide a comparison with the fiscal forecasts in the 2008 Budget Economic and Fiscal Update. They also provide the public with a snapshot of the progress the Government has made in implementing its fiscal strategy as set out in the Fiscal Strategy Report.

Figure 1 - Fiscal strategy at a glance
Figure 1 - Fiscal strategy at a glance.

Fiscal Indicators for the Year Ended to 30 June 2008

Table 1 - Fiscal indicators
Year ended 30 June
$ million 
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
Original
Budget
Est
Actuals
2008
Actual

Revenue and expenses

Core Crown revenue excl NZS Fund 43,371 46,165 51,088 55,844 58,482 59,304 61,814 61,671
Core Crown expenses 39,897 41,882 44,895 49,320 54,004 56,096 57,364 56,997

Surpluses

Total Crown OBEGAL 4,366 5,573 7,075 7,091 5,860 4,958 5,227 5,637
Total Crown OBEGAL
excl NZS Fund retained revenue
4,297 5,526 7,140 7,252 6,250 4,860 5,219 5,586
Total Crown operating balance 1,621 7,309 5,931 9,542 8,022 6,431 2,559 2,384

Cash position

Core Crown residual cash 1,217 520 3,104 2,985 2,793 (976) 908 2,057

Debt

GSID (excl settlement cash) 36,617 36,017 35,478 33,903 30,647 34,477 31,763 31,390
Net core Crown debt
incl NZS Fund financial assets
16,093 11,613 4,538 (1,817) (7,467) (10,784) (11,254) (12,953)
Net core Crown debt 17,977 15,569 11,093 8,044 4,109 4,655 1,846 (19)

NZS Fund

NZS Fund net worth 1,884 3,956 6,555 9,855 12,973 15,977 14,461 14,212
Nominal GDP1 132,738 143,170 151,993 158,321 168,672 173,187 180,137 180,077

% of GDP

Revenue and expenses

Core Crown revenue excl NZS Fund 32.7 32.2 33.6 35.3 34.7 34.2 34.3 34.2
Core Crown expenses 30.1 29.3 29.5 31.2 32.0 32.4 31.8 31.7

Surpluses

Total Crown OBEGAL 3.3 3.9 4.7 4.5 3.5 2.9 2.9 3.1
Total Crown OBEGAL
excl NZS Fund retained revenue
3.2 3.9 4.7 4.6 3.7 2.8 2.9 3.1
Total Crown operating balance 1.2 5.1 3.9 6.0 4.8 3.7 1.4 1.3

Cash position

Core Crown residual cash 0.9 0.4 2.0 1.9 1.7 (0.6) 0.5 1.1

Debt

GSID (excl settlement cash) 27.6 25.2 23.3 21.4 18.2 19.9 17.6 17.4
Net core Crown debt
incl NZS Fund financial assets
12.1 8.1 3.0 (1.1) (4.4) (6.2) (6.2) (7.2)
Net core Crown debt 13.5 10.9 7.3 5.1 2.4 2.7 1.0 (0.0)

NZS Fund

NZS Fund net worth 1.4 2.8 4.3 6.2 7.7 9.2 8.0 7.9
  1. GDP for the year ended 30 June 2008 is the forecast GDP published in the 2008 Pre-election Economic and Fiscal Update (Source: Treasury).

Fiscal Strategy Perspective on the Financial Results to June

The following table shows how the fiscal strategy is represented in the financial results.

Table 2 - Fiscal Strategy Perspective
Fiscal Strategy Fiscal Indicators/Financial Statements Actual
30 June 2007
$million
Forecast
Original Budget
$million
Forecast
Estimated Actuals
$million
Actual
30 June 2008
$million
Taxes … Taxation as % of GDP 31.7% 31.6% 31.5% 31.5%
  Core Crown taxation 53,477 54,707 56,673 56,747
… combined with other revenue … Other Core Crown operating items 7,037 5,852 4,420 4,141
… fund core crown expenses … Core Crown expenses (54,004) (56,096) (57,364) (56,997)
… and with the results of entities outside the budget process … Net surpluses/(deficits) of SOEs and Crown entities 1,512 1,968 (1,170) (1,507)
… results in a surplus or deficit… Operating balance 8,022 6,431 2,559 2,384
…part of which is gains or losses set aside for fiscal strategy purposes… Other (gains)/losses (2,162) (1,473) 2,668 3,253
… and so we have developed an operating indicator excluding these items. OBEGAL 5,860 4,958 5,227 5,637
Some of this is income retained that is not available for fiscal purposes Net return on NZS Fund (excl. revaluations) 390 (98) (8) (51)
Some of this is income retained that is not available for fiscal purposes Net retained surpluses of SOEs and CEs (1,652) (1,652) (655) (814)
and some is income and expenses not impacting cash Non-cash items and working capital movements 3,988 1,830 2,454 2,520
The Operating cash flow that results, needs to provide sufficient funds for Core Crown Cash flow from Operations 8,586 5,038 7,018 7,292
- building up assets in NZ Superannuation Contribution to NZS Fund (2,048) (2,103) (2,103) (2,104)
- meeting the capital expenditure budget, and Purchase of physical assets (1,755) (1,803) (1,544) (1,433)
- making advances (e.g. to students and DHBs) Advances and capital injections (1,990) (2,108) (2,463) (1,698)
with a residual impact on debt consistent with fiscal strategy Residual Cash 2,793 (976) 908 2,057
  … and as a percentage of GDP 1.7% -0.6% 0.5% 1.1%

Revenue

Table 3 - Breakdown of revenue
Year ended 30 June
$ million
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Forecast
Original
Budget
Forecast
Est
Actuals
Actual
2008
Core Crown tax revenue 40,518 43,358 47,468 50,973 53,477 54,707 56,673 56,747
Core Crown other revenue 2,922 2,861 3,577 4,762 4,734 4,695 5,263 5,072
Core Crown revenue 43,440 46,219 51,045 55,735 58,211 59,402 61,936 61,819
Crown entities, SOE and eliminations 13,170 13,051 14,322 15,690 16,378 17,470 17,877 19,660
Total Crown revenue 56,611 59,271 65,367 71,425 74,589 76,872 79,813 81,479
Core Crown revenue 43,440 46,219 51,045 55,735 58,211 59,402 61,936 61,819
Less NZS Fund revenue (69) (131) (191) (359) (436) (447) (381) (385)
Add back NZS Fund intra-segment revenue 77 234 468 707 349 259 237
Core Crown revenue (excl NZS Fund) 43,371 46,165 51,088 55,844 58,482 59,304 61,814 61,671

Revenue consists mainly of tax revenue. Other revenue includes interest, dividends, and sales of goods and services.

Core crown revenue excluding the NZS Fund represents the revenue available to meet the Government's spending needs and treats the NZS Fund as a third party (ie, its revenue is not included but the tax it pays is).

Core Crown revenue excluding the NZS Fund was $143 million (0.2%) lower than forecast at $61,671 million. While interest revenue was $219 million (8.5%) lower than forecast due to changes in interest rates and investment levels, this was partially offset by core Crown tax revenue being $74 million (0.1%) higher than forecast. While core Crown tax revenue was largely on target, there were two compensating variances within this result.

  • source deduction revenue was $613 million (2.7%) higher than forecast largely due to higher than forecast wage growth, offset by
  • GST revenue was $662 million (5.6%) lower than forecast due in the main to weaker-than-expected domestic consumption. In addition the forecast assumed the gap would close between GST revenue and receipts but this did not eventuate.
Figure 2 - Core Crown revenue excluding the NZS Fund
Figure 2 - Core Crown revenue excluding the NZS Fund.
Source: The Treasury
Figure 3 - Core Crown tax revenue
Figure 3 - Core Crown tax revenue.
Source: The Treasury

Compared to last year, core Crown revenue excluding the NZS Fund increased by $3,189 million (5.5%). This increase was mainly in source deductions tax revenue, caused by high wage and employment growth.

Core Crown tax revenue has increased as a percentage of GDP since 1999 as a result of the progressive nature of the personal tax scale (coupled with the introduction of the 39% personal income tax rate), growth in taxable corporate profits ahead of GDP growth, and increases in interest rates which have led to increases in withholding taxes on interest-bearing deposits.

Expenses

Table 4 - Breakdown of expenses
Year ended 30 June
$ million
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Forecast
Original
Budget
Forecast
Est
Actuals
Actual
2008
Social security and welfare 13,907 14,252 14,682 15,598 16,768 17,698 18,071 17,877
Health 7,501 8,111 8,813 9,547 10,355 11,613 11,343 11,297
Education 7,016 7,585 7,930 9,914 9,269 9,719 10,046 9,551
Core government services 2,130 2,091 2,567 2,507 4,817 2,479 3,222 3,371
Other core Crown expenses 9,343 9,843 10,903 11,754 12,795 14,587 14,682 14,901
Core Crown expenses 39,897 41,882 44,895 49,320 54,004 56,096 57,364 56,997
Crown entities, SOE and eliminations 12,347 11,816 13,397 15,015 14,725 15,818 17,222 18,845
Total Crown expenses 52,245 53,698 58,292 64,334 68,729 71,914 74,586 75,842
Figure 4 - Core Crown expenses
Figure 4 - Core Crown expenses.
Source: The Treasury
Figure 5 - Core Crown expenses by sector
Figure 5 - Core Crown expenses by sector.
Source: The Treasury

Core Crown expenses represent the day-to-day operating spending of the Government (ie, it does not include purchases of physical assets or capital spending).

Core Crown expenses were $367 million (0.6%) lower than forecast at $56,997 million. The main variances were:

  • social security and welfare expenses were $194 million (1.1%) lower than forecast mainly relating to lower than forecast family assistance expenditure
  • education expenses were $495 million (4.9%) lower than forecast as the impairment of student loans was $491 million lower than expected
  • core government expenses were $149 million (4.6%) higher then forecast. Impairment of tax receivables was $265 million higher than expected reflecting an increase in the underlying overdue debt. This variance was partially offset by underspends across a number of departments (none of which was individually significant), and
  • other core Crown expenses were $219 million (1.5%) higher than forecast due in the main to treaty settlements being earlier than forecast.

In comparison to the previous year, Core Crown expenses were $2,993 million (5.5%) higher. Significant expenditure increases were:

  • annual indexation of welfare benefits
  • expense initiatives introduced in the 2007 Budget (including the introduction of KiwiSaver), and
  • higher demand-driven education expenses.

This increase was partially offset by a decrease in sovereign receivable impairment expenses resulting from a large one-off tax receivable impairment in the year ended 30 June 2007.

Core Crown expenses have increased as a percentage of GDP by 1.6% since 2003 (30.1% in 2003 to 31.7% in 2008) with the introduction of major Government policies such as Working for Families and KiwiSaver.

Surpluses

Table 5 - Total Crown OBEGAL and total Crown operating balance
Year ended 30 June
$ million
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Forecast
Original
Budget
Forecast
Est
Actuals
Actual
2008
Total Crown OBEGAL 4,366 5,573 7,075 7,091 5,860 4,958 5,227 5,637
Total Crown gains/(losses) (2,745) 1,736 (1,144) 2,451 2,162 1,473 (2,668) (3,253)
Total Crown Operating balance 1,621 7,309 5,931 9,542 8,022 6,431 2,559 2,384

OBEGAL

OBEGAL is the operating balance before gains and losses for the total Crown. By excluding gains and losses the OBEGAL gives a more direct indication of the underlying stewardship of the Government.

Figure 6 - OBEGAL
Figure 6 - OBEGAL.
Source: The Treasury

OBEGAL was $410 million (7.8%) higher than forecast for the year ended 30 June 2008 primarily as a result of a forecasting error included in the Budget. A portion of ACC's actuarial loss was forecast as an insurance expense. This error does not impact on the operating balance as it was a reclassification between expenses and losses.

Within this result, the electricity generating SOEs reported large, equal, and opposite variances in both revenue and expenses of approximately $1,400 million. These variances resulted from higher than expected electricity spot prices.

The OBEGAL (excluding the NZS Fund retained revenue) is a measure of the operating balance that recognises that the NZS Fund has been set up to meet future spending pressures and as a result the returns it earns are not available to the Crown to meet current spending requirements. OBEGAL (excluding the NZS Fund retained revenue) was $5,586 million for the year; $367 million lower than forecast.

Operating Balance

Figure 7 - Operating balance
Figure 7 - Operating balance.
Source: The Treasury

The operating balance shows whether the government sector has generated enough revenues (including gains) to cover its expenses (including losses) in any given year.

The operating balance for the total Crown was $175 million (6.8%) lower than forecast at $2,384 million.

Losses of $3,253 million resulted in a decline in the operating balance for the year ended 30 June 2008 and were $585 million (21.9%) more than forecast. These losses compare to gains of $2,162 million for the previous year. The difference is a reflection of the recent decline in overseas equity markets and increases in the ACC claims and GSF liabilities.

The total Crown operating balance is not drawn upon to fund core Crown operations, as current policy is for the NZS Fund, SOEs and CEs to retain a portion of their surpluses for the purpose of achieving their long-term objectives. For the year ended 30 June 2008 SOEs and CEs recorded an overall deficit of $803 million. This deficit includes an operating deficit of $2,408 million in ACC due to equity market and ACC claims liability losses mentioned above. When ACC is excluded the SOE and CE surpluses totalled $1,605 million (refer pages 164 to 166 for a breakdown by individual entity).

During the year $575 million was returned to the Crown as dividends.

Cash Position

Table 6 - Residual cash reconciliation
Year ended 30 June
$ million
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Forecast
Original
Budget
Forecast
Est
Actuals
Actual
2008
Net core Crown cash flow from operations 4,856 5,443 8,560 8,859 8,586 5,038 7,018 7,292
Contributions to NZS Fund (1,200) (1,879) (2,107) (2,337) (2,048) (2,103) (2,103) (2,104)
Purchase of physical assets (1,059) (1,299) (1,372) (1,826) (1,755) (1,803) (1,544) (1,433)
Advances and capital injections (1,380) (1,745) (1,977) (1,711) (1,990) (2,108) (2,463) (1,698)
Core Crown residual cash 1,217 520 3,104 2,985 2,793 (976) 908 2,057

Core Crown residual cash represents the core Crown cash surplus (or deficit) after operating and investing cash requirements (including contributions to the NZS Fund) are met. It represents the money available to the Government to invest, repay debt or, alternatively, the money the Government needs to fund in any given year.

Figure 8 - Residual cash
Figure 8 - Residual cash.
Source: The Treasury

Residual cash was $1,149 million higher than forecast for the year ended 30 June 2008 at $2,057 million. Increases in the cash surplus were mainly due to:

  • the delay in the $690 million KiwiRail purchase from 30 June to 1 July
  • KiwiSaver payments being $210 million lower than forecast with regards to kick-start payments and employer tax credits, and
  • department cash requirements being $545 million less than expected.

These surpluses were partially offset by tax receipts which were $417 million (0.7%) lower than forecast. In particular, the following tax types were lower than forecast:

  • corporate tax receipts were $419 million (4.0%) lower than forecast due in the main to lower-than-expected provisional tax receipts through May and June from large corporate entities
  • GST receipts were $148 million (1.3%) lower than forecast reflecting the effects of recent economic activity, and
  • net other individuals tax receipts were $130 million (3.3%) lower than forecast due to lower than expected provisional tax payments from the agricultural sector.

In contrast, stronger than expected wage growth contributed to source deduction tax receipts being $124 million (0.5%) higher than forecast.

Over recent years residual cash surpluses have reflected strong economic growth coupled with some departmental underspending.

Table 7 - Application of core Crown residual cash for the year ended 30 June 2008 ($ billion)
Table 7 - Application of core Crown residual cash for the year ended 30 June 2008 ($ billion).

The residual cash of $2,057 million has resulted in an increase in core Crown financial assets as discussed on page 15.

Capital Investment

Core Crown purchases of physical assets ($1,433 million) and advances and capital injections ($1,698 million) represent the capital investment of the core Crown (refer Table 6).

Advances and capital injections are often used by CEs and SOEs to purchase physical assets (such as roading and rail assets). Therefore, to obtain a complete picture of the Government's capital investment it is necessary to “look through” core Crown advances and capital injections and consider total Crown physical asset purchases.

Figures 9 to 11, therefore, show the purchase of physical assets (referred to as “PPE”) of the total Crown, offset by asset disposals.

Figure 9 - Total Crown net purchases of PPE ($ million)
Figure 9 - Total Crown net purchases of PPE ($ million).
Source: The Treasury
Figure 10 - Total Crown net purchases of PPE by sector ($m and % of total) for year ended 30 June 2008
Figure 10 - Total Crown net purchases of PPE by sector ($m and % of total) for year ended 30 June 2008.
Source: The Treasury
Figure 11 - Total Crown net purchases of PPE by asset type ($m and % of total) for year ended 30 June 2008
Figure 11 - Total Crown net purchases of PPE by asset type ($m and % of total) for year ended 30 June 2008.
Source: The Treasury

Total Crown net PPE purchases for the current financial year included:

  • $986 million on state highway roading
  • $571 million on electricity generation assets
  • $509 million on education facilities such as schools
  • $446 million by district health boards
  • $320 million on specialist military equipment, and
  • $234 million on rail assets (excluding KiwiRail).

The $690 million purchase of KiwiRail occurred on 1 July and is therefore not included in this capital investment analysis.

Debt

Table 8 - Gross sovereign-issued debt (GSID) and net core Crown debt
Year ended 30 June
$ million
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Forecast
Original
Budget
Forecast
Est
Actuals
Actual
2008
Gross sovereign-issued debt 36,617 36,017 35,478 35,867 36,805 40,400 37,673 37,745
Less Reserve Bank settlement cash
 (incl. Kiwibank)
(1,964) (7,758) (7,523) (7,510) (7,955)
Add back changes to DMO borrowing due to settlement cash 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding settlement cash 36,617 36,017 35,478 33,903 30,647 34,477 31,763 31,390
Gross sovereign-issued debt 36,617 36,017 35,478 35,867 36,805 40,400 37,673 37,745
Less core Crown financial assets (20,524) (24,404) (30,940) (37,684) (44,272) (51,184) (48,927) (50,698)
Net core Crown debt (incl NZS Fund) 16,093 11,613 4,538 (1,817) (7,467) (10,784) (11,254) (12,953)
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets 1,884 3,956 6,555 9,861 11,576 15,439 13,100 12,934
Net core Crown debt 17,977 15,569 11,093 8,044 4,109 4,655 1,846 (19)

Gross Sovereign-issued Debt (GSID)

GSID (excluding settlement cash) represents the debt issued by the sovereign (ie, core Crown) and includes Government stock held by the NZS Fund, ACC and EQC but excludes money deposited with the Reserve Bank by banks (settlement cash).

GSID (excluding settlement cash) was lower than forecast by $373 million (1.2%) at $31,390 million (17.4% of GDP). This result reflected lower than forecast levels of domestic bonds issuance (refer table 9) partially offset by higher than forecast derivative liabilities.

Figure 12 - GSID (excluding settlement cash)
Figure 12 - GSID (excluding settlement cash).
Source: The Treasury

One of the key components of GSID is the domestic bond programme. Table 9 sets out the historical net issuances and repayments.

Table 9 - Net bond issuance
Year ended 30 June
$ million
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Forecast
Original
Budget
Forecast
Est
Actuals
Actual
2008
Domestic bonds (market) 2,551 2,212 2,146 2,375 2,294 2,520 2,415 1,757
Repayment of domestic bonds (market) (2,823) (3,044) (2,797) (2,574) (2,777)
Net increase/(decrease) in market domestic bonds (272) (832) (651) (199) (483) 2,520 2,415 1,757
Domestic bonds (non-market) 279 478 459 740 570 208 189 130
Repayment of domestic bonds (non-market) (737) (357) (338) (375) (421)
Net increase/(decrease) in non-market domestic bonds (458) 121 121 365 149 208 189 130
Net total bond issuance/(repayment) (730) (711) (530) 166 (334) 2,728 2,604 1,887

Net Core Crown Debt

Figure 13 - Net core Crown debt
Figure 13 - Net core Crown debt.
Source: The Treasury
Figure 14 - Core Crown financial assets (excluding NZS Fund)
Figure 14 - Core Crown financial assets (excluding NZS Fund).
Source: The Treasury

Net core Crown debt equates to core Crown borrowings (gross sovereign-issued debt) less core Crown financial assets (excluding the financial assets of the NZS Fund).

By deducting financial assets (excluding the NZS Fund), net debt can provide additional information about the sustainability of the Government's accounts. However, it is important to view net debt alongside GSID (excluding settlement cash) as some financial assets are not very easily converted to cash (eg, student loans) in the short term.

Net core Crown debt was lower than forecast by $1,865 million (101%) which resulted in a net asset position of $19 million at 30 June 2008. This position is a result of the higher than forecast residual cash surplus in addition to net valuation gains on financial assets and financial liabilities.

Net core Crown debt has decreased by $4,128 million since 30 June 2007. Table 10 provides a breakdown of core Crown net debt by portfolio.

The majority of the decrease in net core Crown debt was in the financial instruments administered by the New Zealand Debt Management Office (NZDMO) ($2,776 million).

NZDMO financial assets have increased by $3,594 million which has been primarily financed by:

  • the current year's residual cash surplus of $2,057 million, and
  • additional borrowings as NZDMO has continued its recent practice of maintaining a smooth bond issuance program year to year.

NZDMO borrowings have increased by around $818 million. As mentioned above the majority of the additional borrowings have been invested in financial assets, so are net debt neutral.

Table 10 - Net core Crown debt by portfolio
Year ended 30 June 2008 Year ended 30 June 2007
$ million NZDMO Reserve
Bank
Student
loans
Other Total NZDMO Reserve
Bank
Student
loans
Other Total
Core Crown borrowings 28,861 8,689 195 37,745 28,043 8,508 254 36,805
Core Crown financial assets 17,001 13,735 6,741 287 37,764 13,407 13,023 6,011 255 32,696
Net core Crown debt 11,860 (5,046) (6,741) (92) (19) 14,636 (4,515) (6,011) (1) 4,109

NZS Fund

Table 11 - NZS Fund net worth
Year ended 30 June
$ million
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Forecast
Original
Budget
Forecast
Est
Actuals
Actual
2008
Opening net worth 615 1,884 3,956 6,555 9,855 12,910 12,973 12,973
Revenue 69 131 191 359 436 447 381 385
Less current tax expense (77) (234) (468) (707) (349) (259) (237)
Less other expenses (7) (22) (52) 52 (51) (34)
Gains/(losses) 146 557 1,130 1,313 866 (686) (995)
Operating balance 69 193 492 969 1,094 964 (615) (881)
Gross contribution from the Crown 1,200 1,879 2,107 2,337 2,048 2,103 2,103 2,104
Other movements in reserves (6) (24) 16
Closing net worth 1,884 3,956 6,555 9,855 12,973 15,977 14,461 14,212

The NZS Fund (“the Fund”) is an important component of the Government's fiscal strategy. The Fund's assets provide the means for the Government to partially pre-fund future fiscal pressures, particularly those pressures arising from an ageing population.

The Government's contributions to the Fund are calculated over a 40 year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met.

The Fund made an operating loss of $881 million for the year ended 30 June 2008. This compares to an operating profit of $1,094 million in the previous year and a forecast loss of $615 million for the current year. This loss results from the downturn in equity markets (particularly the United States). The Fund's full year return was -4.92% bringing its annualised return since inception to 10.34%. This return compares to the risk-free rate of return for the same period of 6.73%.

The Fund's net worth at 30 June 2008 was $14,212 million, an increase of $1,239 million since 30 June 2007. $2,104 million of this increase is from Government contributions which were offset by the Fund's investment performance.

Figure 15 - NZS Fund net worth
Figure 15 - NZS Fund net worth.
Source: The Treasury

Historical Financial Information

Year ended 30 June
$ million
1999
Actual
2000
Actual
2001
Actual
2002
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
Statement of financial performance  
Core Crown tax revenue 30,875 32,598 35,345 36,809 40,518 43,358 47,468 50,973 53,477 56,747
Core Crown other revenue 2,005 2,348 2,497 3,136 2,922 2,861 3,577 4,762 4,734 5,072
Core Crown revenue 32,880 34,946 37,842 39,945 43,440 46,219 51,045 55,735 58,211 61,819
Crown entities, SOE revenue and eliminations 7,086 6,666 7,259 10,003 13,170 13,051 14,322 15,690 16,378 19,660
Total Crown revenue 39,966 41,612 45,101 49,948 56,611 59,271 65,367 71,425 74,589 81,479
Social security and welfare 12,889 12,883 13,207 13,485 13,907 14,252 14,682 15,598 16,768 17,877
Health 5,875 6,146 6,660 7,032 7,501 8,111 8,813 9,547 10,355 11,297
Education 5,337 5,712 6,136 6,473 7,016 7,585 7,930 9,914 9,269 9,551
Core government services 1,984 1,992 2,148 1,890 2,130 2,091 2,567 2,507 4,817 3,371
Other core Crown expenses 7,854 8,096 8,408 8,633 9,343 9,843 10,903 11,754 12,795 14,901
Core Crown expenses 33,939 34,829 36,559 37,513 39,897 41,882 44,895 49,320 54,004 56,997
Crown entities, SOE expenses and eliminations 5,899 6,189 7,120 9,964 12,347 11,816 13,397 15,015 14,725 18,845
Total Crown expenses 39,838 41,018 43,679 47,476 52,245 53,698 58,292 64,334 68,729 75,842
OBEGAL 128 594 1,422 2,471 4,366 5,573 7,075 7,091 5,860 5,637
Gains/(losses) 1,577 811 (214) (185) (2,745) 1,736 (1,144) 2,451 2,162 (3,253)
Operating balance 1,705 1,405 1,208 2,286 1,621 7,309 5,931 9,542 8,022 2,384
Statement of financial position  
Property, plant and equipment 42,102 43,609 45,954 50,536 52,667 57,940 67,494 89,141 95,598 103,329
Financial assets 18,564 18,756 21,419 22,497 27,799 32,654 42,005 66,396 73,719 85,063
Other assets 11,305 11,459 11,467 14,846 18,461 18,756 19,714 9,503 11,031 12,443
Total assets 71,971 73,824 78,840 87,879 98,927 109,351 129,212 165,040 180,348 200,835
Borrowings 38,715 37,527 38,130 38,492 39,327 37,720 37,728 40,027 41,898 46,110
Other liabilities 23,134 23,692 25,260 26,562 31,588 32,036 37,243 41,042 41,623 49,211
Total liabilities 61,850 61,219 63,390 65,055 70,915 69,756 74,972 81,069 83,521 95,321
Net worth 10,121 12,605 15,450 22,825 28,012 39,595 54,240 83,971 96,827 105,514
Fiscal Indicators  
Core Crown revenue (excl NZS Fund) 32,880 34,946 37,842 39,930 43,371 46,165 51,088 55,844 58,482 61,671
Core Crown expenses 33,939 34,829 36,559 37,513 39,897 41,882 44,895 49,320 54,004 56,997
OBEGAL 128 594 1,422 2,471 4,366 5,573 7,075 7,091 5,860 5,637
OBEGAL (excl NZS Fund) 128 594 1,422 2,456 4,297 5,526 7,140 7,252 6,250 5,586
Operating balance 1,705 1,405 1,208 2,286 1,621 7,309 5,931 9,542 8,022 2,384
Core Crown residual cash 2,048 (386) 349 216 1,217 520 3,104 2,985 2,793 2,057
GSID (excluding settlement cash) 37,307 36,580 37,194 36,650 36,617 36,017 35,478 33,903 30,647 31,390
Net core Crown debt 22,275 21,900 20,293 19,666 17,977 15,569 11,093 8,044 4,109 (19)
NZS Fund net worth 615 1,884 3,956 6,555 9,855 12,973 14,212

Historical Financial Information (continued)

Year ended 30 June
$ million
1999
Actual
2000
Actual
2001
Actual
2002
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
GDP 104,651 111,039 118,357 125,808 132,738 143,170 151,993 158,321 168,672 180,077
Statement of financial performance  
Core Crown tax revenue 29.5% 29.4% 29.9% 29.3% 30.5% 30.3% 31.2% 32.2% 31.7% 31.5%
Core Crown other revenue 1.9% 2.1% 2.1% 2.5% 2.2% 2.0% 2.4% 3.0% 2.8% 2.8%
Core Crown revenue 31.4% 31.5% 32.0% 31.8% 32.7% 32.3% 33.6% 35.2% 34.5% 34.3%
Crown entities, SOE and elimination revenue 6.8% 6.0% 6.1% 8.0% 9.9% 9.1% 9.4% 9.9% 9.7% 10.9%
Total Crown revenue 38.2% 37.5% 38.1% 39.7% 42.6% 41.4% 43.0% 45.1% 44.2% 45.2%
Social security and welfare 12.3% 11.6% 11.2% 10.7% 10.5% 10.0% 9.7% 9.9% 9.9% 9.9%
Health 5.6% 5.5% 5.6% 5.6% 5.7% 5.7% 5.8% 6.0% 6.1% 6.3%
Education 5.1% 5.1% 5.2% 5.1% 5.3% 5.3% 5.2% 6.3% 5.5% 5.3%
Core government services 1.9% 1.8% 1.8% 1.5% 1.6% 1.5% 1.7% 1.6% 2.9% 1.9%
Other core Crown expenses 7.5% 7.3% 7.1% 6.9% 7.0% 6.9% 7.2% 7.4% 7.6% 8.3%
Core Crown expenses 32.4% 31.4% 30.9% 29.8% 30.1% 29.3% 29.5% 31.2% 32.0% 31.7%
Crown entities, SOE and elimination expenses 5.6% 5.6% 6.0% 7.9% 9.3% 8.3% 8.8% 9.5% 8.7% 10.5%
Total Crown expenses 38.1% 36.9% 36.9% 37.7% 39.4% 37.5% 38.4% 40.6% 40.7% 42.1%
OBEGAL 0.1% 0.5% 1.2% 2.0% 3.3% 3.9% 4.7% 4.5% 3.5% 3.1%
Gains/(losses) 1.5% 0.7% -0.2% -0.1% -2.1% 1.2% -0.8% 1.5% 1.3% -1.8%
Operating balance 1.6% 1.3% 1.0% 1.8% 1.2% 5.1% 3.9% 6.0% 4.8% 1.3%
Statement of financial position  
Property, plant and equipment 40.2% 39.3% 38.8% 40.2% 39.7% 40.5% 44.4% 56.3% 56.7% 57.4%
Financial assets 17.7% 16.9% 18.1% 17.9% 20.9% 22.8% 27.6% 41.9% 43.7% 47.2%
Other assets 10.8% 10.3% 9.7% 11.8% 13.9% 13.1% 13.0% 6.0% 6.5% 6.9%
Total assets 68.8% 66.5% 66.6% 69.9% 74.5% 76.4% 85.0% 104.2% 106.9% 111.5%
Borrowings 37.0% 33.8% 32.2% 30.6% 29.6% 26.3% 24.8% 25.3% 24.8% 25.6%
Other liabilities 22.1% 21.3% 21.3% 21.1% 23.8% 22.4% 24.5% 25.9% 24.7% 27.3%
Total liabilities 59.1% 55.1% 53.6% 51.7% 53.4% 48.7% 49.3% 51.2% 49.5% 52.9%
Net worth 9.7% 11.4% 13.1% 18.1% 21.1% 27.7% 35.7% 53.0% 57.4% 58.6%
Fiscal Indicators  
Core Crown revenue (excl NZS Fund) 31.4% 31.5% 32.0% 31.7% 32.7% 32.2% 33.6% 35.3% 34.7% 34.2%
Core Crown expenses 32.4% 31.4% 30.9% 29.8% 30.1% 29.3% 29.5% 31.2% 32.0% 31.7%
OBEGAL 0.1% 0.5% 1.2% 2.0% 3.3% 3.9% 4.7% 4.5% 3.5% 3.1%
OBEGAL (excl NZS Fund) 0.1% 0.5% 1.2% 2.0% 3.2% 3.9% 4.7% 4.6% 3.7% 3.1%
Operating balance 1.6% 1.3% 1.0% 1.8% 1.2% 5.1% 3.9% 6.0% 4.8% 1.3%
Core Crown residual cash 2.0% -0.3% 0.3% 0.2% 0.9% 0.4% 2.0% 1.9% 1.7% 1.1%
GSID (excluding settlement cash) 35.6% 32.9% 31.4% 29.1% 27.6% 25.2% 23.3% 21.4% 18.2% 17.4%
Net core Crown debt 21.3% 19.7% 17.1% 15.6% 13.5% 10.9% 7.3% 5.1% 2.4% 0.0%
NZS Fund net worth 0.0% 0.0% 0.0% 0.5% 1.4% 2.8% 4.3% 6.2% 7.7% 7.9%

Report of the Auditor-General

To the Readers of the Financial Statements of the Government of New Zealand for the year ended 30 June 2008

I have audited the financial statements of the Government of New Zealand for the year ended 30 June 2008, using my staff, resources and appointed auditors and their staff.

Unqualified Opinion

In our opinion, the financial statements of the Government of New Zealand comprising the Statement of Financial Performance, Analysis of Expenses by functional Classification, Statement of Cash Flows, Statement of Recognised income and Expense, Statement of Financial Position, Notes 1 to 34, Statement of Borrowings, Statement of Unappropriated Expenditure, and the Statement of Trust Money.

  • comply with generally accepted accounting practice in New Zealand; and
  • fairly reflect:
    • the Government of New Zealand’s financial position as at 30 June 2008; and
    • the results of its operations and cash flows for the year ended on that date;

The audit was completed on 30 September 2008, and is the date at which our opinion is expressed.

The basis of our opinion is explained below. In addition, we outline the responsibilities of the Government and the Auditor, and explain our independence.

Basis of Opinion

We carried out the audit in accordance with the Auditor-General’s Auditing Standards, which incorporate the New Zealand Auditing Standards.

We planned and performed the audit to obtain all the information and explanations we considered necessary in order to obtain reasonable assurance that the financial statements did not have material misstatements, whether caused by fraud or error.

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

The audit involved performing procedures to test the information presented in the financial statements. We assessed the results of those procedures in forming our opinion.

Audit procedures generally include:

  • determining whether significant financial and management controls are working and can be relied on to produce complete and accurate data;
  • verifying samples of transactions and account balances;
  • performing analyses to identify anomalies in the reported data;
  • reviewing significant estimates and judgements made;
  • confirming year-end balances;
  • determining whether accounting policies are appropriate and consistently applied; and
  • determining whether all financial statement disclosures are adequate.

We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements.

We evaluated the overall adequacy of the presentation of information in the financial statements. We obtained all the information and explanations we required to support our opinion above.

Responsibilities of the Government and the Auditor

The Treasury is responsible for preparing financial statements for the Government in accordance with generally accepted accounting practice in New Zealand. Those financial statements must fairly reflect the financial position of the Government as at 30 June 2008.  They must also fairly reflect the results of its operations and cash flows for the year ended on that date. The Minister of Finance is responsible for forming an opinion that those financial statements fairly reflect the financial position and operations of the Government for that year.  The responsibilities of the Treasury and the Minister of Finance arise from the Public Finance Act 1989.

We are responsible for expressing an independent opinion on the financial statements and reporting that opinion to you. This responsibility arises from section 15 of the Public Audit Act 2001 and section 30 of the Public Finance Act 1989.

Independence

The Auditor-General, as an Officer of Parliament, is constitutionally and operationally independent of the Government.  Other than in exercising functions and powers under the Public Audit Act 2001 as the auditor of public entities, the Auditor-General has no relationship with or interest in the Government.

 

K B Brady
Controller and Auditor-General
Wellington
New Zealand

 

 

Matters Relating to the Electronic Presentation of the Audited Financial Statements

This audit report relates to the financial statements of the Financial Statements of the Government for the year ended 30 June 2008 included on the Treasury’s website. The Secretary to the Treasury’s is responsible for the maintenance and integrity of the Treasury’s website. We have not been engaged to report on the integrity of the Treasury’s website. We accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

The audit report refers only to the financial statements named above. It does not provide an opinion on any other information which may have been hyperlinked to or from the financial statements. If readers of this report are concerned with the inherent risks arising from electronic data communication they should refer to the published hard copy of the audited financial statements and related audit report dated 30 September 2008 to confirm the information included in the audited financial statements presented on this website.

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

Financial Statements

Statement of Financial Performance

for the year ended 30 June 2008

Statement of Financial Performance for the year ended 30 June 2008
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
Note 30 June 2008
$m
30 June 2007
$m
Revenue  
54,173 56,186 Taxation revenue 2 56,372 53,064
3,693 3,851 Other sovereign revenue 2 3,879 3,496
57,866 60,037 Total revenue levied through the Crown's sovereign power 60,251 56,560
13,253 13,682 Sales of goods and services 3 15,399 12,613
3,366 3,203 Interest revenue and dividends 4 3,214 2,995
2,387 2,891 Other revenue 5 2,615 2,421
19,006 19,776 Total revenue earned through operations 21,228 18,029
76,872 79,813 Total revenue (excluding gains) 81,479 74,589
Expenses  
17,892 18,520 Transfer payments and subsidies 6 18,374 16,346
15,657 16,422 Personnel expenses 7 16,478 15,284
3,296 3,618 Depreciation and amortisation 8 3,670 3,397
28,997 29,217 Other operating expenses 9 30,656 27,842
2,748 2,954 Interest expenses 10 3,101 2,885
3,010 4,095 Insurance expenses 11 3,563 2,975
314 Forecast new operating spending
(240) Top-down expense adjustment
71,914 74,586 Total expenses (excluding losses) 75,842 68,729
4,958 5,227 Operating balance before gains/(losses) 5,637 5,860
1,377 (824) Net gains/(losses) on financial instruments 12 (617) 1,565
(2,007) Net gains/(losses) on non-financial instruments 13 (2,925) 486
1,377 (2,831) Total gains/(losses) (3,542) 2,051
96 166 Net surplus/(deficit) from associates and joint ventures 334 191
6,431 2,562 Operating balance from continuing activities 2,429 8,102
(3) Gain/(loss) from discontinued operations 22 (92)
6,431 2,559 Operating balance (including minority interest) 2,451 8,010
Operating balance attributable to minority interest in
Air New Zealand
(67) 12
6,431 2,559 Operating balance 2,384 8,022

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Analysis of Expenses by Functional Classification

for the year ended 30 June 2008

Analysis of Expenses by Functional Classification
for the year ended 30 June 2008
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Total Crown expenses  
21,271 22,274 Social security and welfare 21,509 19,829
629 714 GSF pension expenses 690 645
11,699 10,765 Health 10,809 9,989
10,321 10,803 Education 10,397 9,853
2,132 3,163 Core government services 3,274 4,763
3,076 3,192 Law and order 3,082 2,822
1,597 1,524 Defence 1,525 1,478
7,671 7,185 Transport and communications 7,424 6,855
5,879 7,433 Economic and industrial services 9,038 5,395
1,319 1,404 Primary services 1,459 1,233
2,218 2,366 Heritage, culture and recreation 2,337 2,043
961 965 Housing and community development 938 865
79 84 Other 259 74
2,748 2,954 Finance costs 3,101 2,885
314 Forecast new operating spending
(240) Top-down expense adjustment
71,914 74,586 Total Crown expenses excluding losses 75,842 68,729

Below is an analysis of core Crown expenses by functional classification. Core Crown expenses include expenses incurred by the Crown, Departments and the Reserve Bank, but not Crown entities and SOEs.

Analysis of Expenses by Functional Classification
for the year ended 30 June 2008 (continued)
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Core Crown expenses  
17,698 18,071 Social security and welfare 17,877 16,768
629 714 GSF pension expenses 690 645
11,613 11,343 Health 11,297 10,355
9,719 10,046 Education 9,551 9,269
2,479 3,222 Core government services 3,371 4,817
2,836 2,943 Law and order 2,894 2,699
1,641 1,566 Defence 1,562 1,517
2,792 2,290 Transport and communications 2,244 2,405
2,276 2,828 Economic and industrial services 2,889 1,595
494 565 Primary services 541 438
977 1,123 Heritage, culture and recreation 1,107 844
304 282 Housing and community development 260 255
80 84 Other 254 68
2,244 2,527 Finance costs 2,460 2,329
314 Forecast new operating spending
(240) Top-down expense adjustment
56,096 57,364 Total core Crown expenses excluding losses 56,997 54,004

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Statement of Cash Flows

for the year ended 30 June 2008

Statement of Cash Flows for the year ended 30 June 2008
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
Note 30 June 2008
$m
30 June 2007
$m
Cash Flows From Operations  
Cash was provided from  
54,266 55,662 Taxation receipts 2 55,168 52,157
3,472 3,496 Other sovereign receipts 2 3,460 3,224
13,394 14,001 Sales of goods and services 14,635 12,996
2,760 2,718 Interest and dividend receipts 3,111 2,491
2,302 2,532 Other operating receipts 2,211 2,222
76,194 78,409 Total cash provided from operations 78,585 73,090
Cash was disbursed to  
19,529 18,242 Transfer payments and subsidies 18,026 16,344
44,025 46,643 Personnel and operating payments 45,972 41,845
2,530 2,705 Interest payments 2,820 2,441
314 Forecast new operating spending
(240) Top-down expense adjustment
66,398 67,350 Total cash disbursed to operations 66,818 60,630
9,796 11,059 Net cash flows from operations 11,767 12,460
Cash Flows From Investing Activities  
Cash was provided from  
226 384 Sale of physical assets 401 432
9,237 23,050 Sale of shares and other securities 26,208 20,017
13 Sale of intangible assets 26
1,091 2,144 Repayment of advances 1,173 2,156
2 Sale of investments in associates 109 28
10,554 25,593 Total cash provided from investing activities 27,917 22,633
Cash was disbursed to  
6,887 6,210 Purchase of physical assets 5,323 5,646
13,728 28,013 Purchase of shares and other securities 32,288 28,558
144 312 Purchase of intangible assets 346 232
2,719 3,297 Issue of advances 3,819 2,900
95 996 Acquisition of investments in associates 472 323
184 690 Capital contingency provision
23,757 39,518 Total cash disbursed to investing activities 42,248 37,659
(13,203) (13,925) Net cash flows from investing activities (14,331) (15,026)
(3,407) (2,866) Net cash flows from operating and investing activities (2,564) (2,566)

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Statement of Cash Flows for the year ended 30 June 2008 (continued)
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
(3,407) (2,866) Net cash flows from operating and investing activities (2,564) (2,566)
Cash Flows From Financing Activities  
Cash was provided from  
178 260 Issues of circulating currency 86 81
3,860 3,335 Issue of  Government stock and treasury bills1 2,769 2,883
3 922 Issue of foreign currency borrowing 1,278 2,493
2,225 1,735 Issue of other New Zealand dollar borrowing 2,147 5,999
6,266 6,252 Total cash provided from financing activities 6,280 11,456
Cash was disbursed to  
1,637 978 Repayment of Government stock and treasury bills1 1,095 6,640
1,133 1,341 Repayment of foreign currency borrowing 179 713
Repayment of other New Zealand dollar borrowing 2,819 971
Dividends paid to minority interests 25 37
2,770 2,319 Total cash disbursed to financing activities 4,118 8,361
3,496 3,933 Net cash flows from financing activities 2,162 3,095
89 1,067 Net movement in cash (402) 529
3,107 4,163 Opening cash balance 4,162 3,676
(13) Foreign-exchange gains/(losses) on opening cash 44 (43)
3,196 5,217 Closing cash balance 3,804 4,162

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 161.

Statement of Cash Flows for the year ended 30 June 2008 (continued)
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Reconciliation Between the Net Cash Flows from Operations
and the Operating Balance
 
9,796 11,059 Net Cash Flows from Operations
Items included in the operating balance

but not in net cash flows from operations
11,767 12,460
Gains/(losses)  
1,377 (824) Gains/(losses) on other financial instruments (617) 1,565
(2,007) Gains/(losses) on other non-financial instruments (2,925) 486
1,377 (2,831) Total gains/(losses) (3,542) 2,051
Other Non-cash Items in Operating Balance  
(3,296) (3,618) Depreciation and amortisation (3,670) (3,397)
(518) (628) Write-down on initial recognition of financial assets (559) (629)
(38) 201 Impairment on financial assets (excl receivables) 213 37
(51) (78) Decrease/(increase) in defined benefit retirement plan liabilities 2 13
(1,013) (2,276) Decrease/(increase) in insurance liabilities (1,358) (1,098)
97 166 Other 334 191
(4,819) (6,233) Total other non-cash Items (5,038) (4,883)
Movements in Working Capital  
218 267 Increase/(decrease) in receivables 2,100 (1,591)
389 237 Increase/(decrease) in accrued interest (179) 61
41 107 Increase/(decrease) in inventories 138 83
(2) (49) Increase/(decrease) in prepayments 77 (89)
(80) Decrease/(increase) in deferred revenue (326) (73)
(569) 82 Decrease/(increase) in payables (2,613) 3
77 564 Total movements in working capital (803) (1,606)
6,431 2,559 Operating balance 2,384 8,022

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Statement of Recognised Income and Expense

for the year ended 30 June 2008

Statement of Recognised Income and Expense for the year ended 30 June 2008
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
43 Revaluation of physical assets 5,896 4,791
Share of associates revaluation of physical assets 318 471
39 (2) Effective portion of changes in the fair value of cash flow hedges 9 (331)
74 (15) Net change in fair value of cash flow hedges transferred
to operating profit
22 (59)
(36) Net change in fair value of cash flow hedges transferred to the
hedged item
(60) (13)
3 Foreign currency translation differences for foreign operations 17 (65)
7 Valuation gain/(losses) on investments available for sale
taken to reserves
11 10
Other movements 11
113 Total income/(expense) recognised directly in net worth 6,213 4,815
6,431 2,559 Operating Balance (including minority interest) 2,451 8,010
6,544 2,559 Total recognised income and expense 8,664 12,825
Attributable to:  
- minority interest in Air New Zealand 83 (80)
6,544 2,559 - the Crown 8,581 12,905
6,544 2,559 Total recognised income and expense 8,664 12,825

This statement reports changes in net worth due to the operating balance, items of income or expense that are recognised directly in net worth and the effect of certain accounting changes.

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Statement of Financial Position

as at 30 June 2008

Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
Note 30 June 2008
$m
30 June 2007
$m
Assets  
3,196 5,217 Cash and cash equivalents 3,804 4,162
12,547 12,326 Receivables 14 14,158 12,057
35,134 36,365 Marketable securities, deposits and derivatives in gain 15 41,189 33,190
16,986 12,536 Share investments 16 12,964 13,581
12,838 13,907 Advances 17 12,948 10,728
982 933 Inventory 18 964 826
1,492 1,425 Other assets 19 1,663 1,527
95,950 98,355 Property, plant & equipment 20 103,329 95,598
6,647 7,519 Equity accounted investments 21 8,065 7,001
1,555 1,772 Intangible assets and goodwill 1,751 1,677
184 690 Forecast for new capital spending
(200) Top-down capital adjustment
187,311 191,045 Total assets 200,835 180,347
Liabilities  
3,730 3,704 Issued currency 3,530 3,444
9,036 8,423 Payables 22 10,895 8,077
845 1,046 Deferred revenue 1,292 966
46,364 45,546 Borrowings 23 46,110 41,898
19,011 20,752 Insurance liabilities 24 20,484 17,418
8,414 8,146 Retirement plan liabilities 25 8,257 7,161
3,850 4,045 Provisions 26 4,753 4,556
91,250 91,662 Total liabilities 95,321 83,520
96,061 99,383 Total assets less total liabilities 105,514 96,827
Net Worth  
48,239 46,767 Taxpayer funds 46,700 44,222
47,402 52,498 Property, plant and equipment revaluation reserve 58,566 52,442
127 (178) Other reserves (134) (133)
95,768 99,087 Total net worth attributable to the Crown 27 105,132 96,531
293 296 Net worth attributable to minority interest in
Air New Zealand
382 296
96,061 99,383 Total net worth 105,514 96,827

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Notes to the Financial Statements

Note 1: Summary of Accounting Policies

Statement of compliance

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. The financial statements comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as appropriate for public benefit entities. These are the first set of annual audited financial statements of the Government prepared in accordance with NZ IFRS.

The Financial Statements were authorised for issue by the Minister of Finance on 30 September 2008.

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

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

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

Early adoption of standards and interpretations

The Government has elected to adopt the following Standards and Interpretations in advance of their effective dates:

  • NZ IFRS 3 Business Combinations amendments with consequential amendments to other standards revising the application of the acquisition method (effective for reporting periods beginning on or after 1 January 2009)
  • NZ IFRS 2 Share Based Payments amendment relating to vesting conditions and cancellations (effective for reporting periods beginning on or after 1 January 2009)
  • NZ IAS 32 Financial Instruments: Presentation amendments relating to puttable instruments and obligations arising on liquidation (effective for reporting periods beginning on or after 1 January 2009)
  • NZ IFRIC 12 Service Concession Arrangements (effective for reporting periods beginning on or after 1 January 2008)
  • NZ IFRIC 13 Customer Loyalty Programmes (effective for reporting periods beginning on or after 1 July 2008), and
  • NZ IFRIC 14/ IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for reporting periods beginning on or after 1 January 2008).

The adoption of these standards and interpretations has had no impact on these financial statements of the Government.

Standards and interpretations not yet adopted

At the date of authorisation of these financial statements, other than the Standards and Interpretations adopted by the Government in advance of their effective dates (as described above) the following amended standards and interpretations were issued but not yet effective:

  • NZ IAS 1 (Amended) Presentation of Financial Statements requiring a statement of comprehensive income (effective from 1 January 2009)
  • NZ IFRS 8 Operating Segments (effective for accounting periods beginning on or after 1 January 2009), and
  • NZ IAS 23 (Revised) Borrowing Costs (effective for accounting periods beginning on or after 1 January 2009).

NZ IAS 1 is a presentation Standard which will result in changes in presentation and a number of additional disclosures but which is not expected to impact on the operating balance, net worth or other key fiscal indicators of the Government.

Public benefit entities are not required to comply with the requirements of NZ IFRS 8 and therefore this standard will not impact on the financial statements. These financial statements continue to show segmental information as appropriate for a Government Reporting entity.

The revision to NZ IAS 23 requiresdirectly attributable borrowing costs relating to qualifying assets to be capitalised. Application of this revised standard will increase the depreciation expense, reduce the interest expense reported in the statement of financial performance and increase the reported carrying values of tangible assets and the net worth of the Government. The amounts involved depend on a variety of assumptions required to be made and therefore it is not possible to reasonably estimate the financial impact of this change.

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 will be 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 purchase method of combination:

Core 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 (excl. Tertiary Education Institutions)
  • Air New Zealand 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 note 21. This recognises these entities' net assets, including asset revaluation movements and 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, and
  • 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 entity's surpluses and deficits are recognised in the statement of financial performance.

Business combinations that occurred prior to the transition to NZ IFRS are not restated retrospectively.

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 for the services unless an alternative method better represents the stage of completion of the transaction.

Interest income

Interest income is accrued using the effective interest 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 deferred in net worth 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 directly to net worth.

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.

Financial instruments

Financial assets

Financial assets are designated into the following categories: loans and receivables, financial instruments available-for-sale, financial assets held for trading, and financial instruments 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.

Although they do not arise out of a contract, receivables from taxes, levies and fines (and any penalties associated with these activities) as well as social benefit receivables are for ease of presentation purposes included as a financial instrument. These non-contract receivables, collectively referred to as sovereign receivables, are designated separately from other financial assets.

Financial assets

Major financial asset type

Designation
Tax, levy, fine and social benefit receivables All designated as sovereign receivables
Trade and other receivables All designated as loans and receivables
Student loans All designated as loans and receivables
Kiwibank mortgages Generally designated as fair value through profit and loss
Other advances Generally designated as loans and receivables
Reserve position at the IMF Generally designated as available for sale
Share Investments Generally designated as fair value through profit and loss
Marketable securities Generally designated as fair value through profit and loss

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 is presented as tax revenue in the statement of financial performance.

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 revenue 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.

In accordance with this general policy, student loans are recognised initially at 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.

The student loans valuation model has been adapted to reflect current student loans policy. As such, the carrying value is sensitive to changes on a number of underlying assumptions, including future income levels, repayment behaviour and macro economic factors such as inflation and the discount rates used to determine the effective interest rate on new borrowers.

The data for valuation of student loans has been integrated from files provided by Inland Revenue Department, Ministry of Social Development and the Ministry of Education. The current data is up to 31 March 2007, and contains information on borrowings, repayments, income, educational factors, and socio-economic factors amongst others and has been analysed and incorporated into the valuation model. This integrated data has been supplemented by less detailed, but more recent data to value student loans at balance date. Given the lead time required to compile and analyse the detailed, integrated data, it is expected that there is a lag between the availability of this data set and balance date.

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

Available-for-sale financial assets are initially recorded at fair value plus transaction costs. They are subsequently recorded at fair value with any resultant fair value gains or losses recognised directly in net worth except 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 net worth include any related foreign exchange component. At derecognition, the cumulative fair value gain or loss previously recognised directly in net worth is recognised in the statement of financial performance.

Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with a maturity of no more than three months from date of acquisition.

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 following notes. At each balance date an assessment is made whether there is objective evidence that a financial asset or group of financial assets is impaired.

Financial liabilities

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

Other financial liabilities are recognised initially at fair value less transaction costs and subsequently measured at amortised cost using the effective interest rate method. Financial liabilities entered into with a duration 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 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 part of any gain or loss on the derivative is recognised in net worth and the ineffective part 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 purchase of an asset in a foreign currency), the amount recognised directly in net worth is included in the initial cost of the asset or liability. Otherwise, gains or losses recognised in net worth transfer to the statement of financial performance in the same periods as when the hedged item affects the statement of financial performance (eg, when the forecast sale occurs). Effective parts 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 net worth 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 weighted average method) and net realisable value. Inventories held for distribution for public benefit purposes are recorded at cost adjusted where applicable for any loss of service potential. Where inventories are acquired at no cost, or for nominal consideration, the cost is deemed to be the current replacement cost at the date of acquisition.

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

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

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/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 & 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 Electricity distribution network assets are recorded at cost, less accumulated depreciation and accumulated impairment losses.
Electricity Generation Electricity generation assets are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
Other Plant and Equipment Other plant and equipment, which include motor vehicles and office equipment, are recorded at cost less accumulated depreciation and accumulated impairment losses.
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.

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 based evidence, such as discounted cash flow calculations. If no market based 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, optimised depreciated replacement 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 retained earnings.

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. 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 25 years
State highways:  
Pavement (surfacing) 7 years
Pavement (other) 36 years
Bridges 90 to 100 years
Rail Network:  
Track and ballast 40 years
Tunnels and bridges 80 years 

Overhead traction and signalling

20 years

Aircraft (ex 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 25 years

Specified heritage and cultural assets are generally not depreciated.

Note 1: Summary of Accounting Policies (continued)

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 their operating and financing policies, but does have a number of powers in relation to these entities, it is appropriate to treat them as associates.

Biological assets

Biological assets (eg, trees, sheep) managed for harvesting into agricultural produce (eg, logs, wool) or for transforming into additional biological assets are measured at fair value less estimated point-of-sale costs, 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 still 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.

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 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 annually to determine if there is any indication of impairment. All intangible assets with an indefinite life are tested for impairment annually. 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 in Air New Zealand is tested for impairment annually.

Non-current assets held for sale and discontinued operations

Non-current assets or disposal groups are separately classified where their carrying amount will be recovered through a sale transaction rather than continuing use; that is, where such assets are available for immediate sale and where sale is highly probable. Non-current assets 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 the liability, 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 ACC claims liabilities is revalued annually based on the latest actuarial information. Movements of the liability are reflected in the statement of financial performance. Financial assets backing the liability are designated at fair value through profit and loss.

Note 1: Summary of Accounting Policies (continued)

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 assets and contingent liabilities

Contingent liabilities and contingent assets are reported at the point at which the contingency is evident. Contingent 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 period end
  • non-cancellable operating leases with a lease term of more than one year
  • 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 Original Budget were forecasts published in the 2007 Budget Economic and Fiscal Update while Estimated Actuals were forecasts published in the 2008 Budget Economic and Fiscal Update. These forecasts include budget adjustments for new unallocated spending during the year (both operating and capital) and top-down adjustments which reduce the bias for forecast expenditure by departments to reflect maximum spending limits instead of mid-point estimates.

Segment analysis

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

  • Core Crown: This group, which includes Ministers, government departments, offices of Parliament, the Reserve Bank of New Zealand and the New Zealand Superannuation Fund most closely represents the budget sector and provides information that is useful for fiscal analysis purposes.
  • State-owned enterprises including entities governed by the State -owned Enterprises Act, and for the purposes of these statements also includes Air New Zealand, 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 government 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 statements items. This functional analysis is drawn from the Classification of the Functions of Government produced by the International Monetary Fund.

Related parties

The Government comprises a large number of commonly controlled entities. These entities, and their key management personnel, transact among themselves and with the Government Reporting Entity on a regular basis, for example, for the purchase of postage stamps or the registration of vehicles. The Public Finance Act 1989 requires separate reporting by these individual entities and these entities will report transactions with the Crown and other related parties as appropriate in these individual financial statements.

With the exception of key management personnel, no other parties control the Government, are controlled by the Government without being consolidated, or are under common control of another entity with the government. Tertiary education institutions, joint ventures and the Government Superannuation Fund are however considered related parties due to government influence and transactions between the rest of the Government Reporting Entity and these entities are separately disclosed where material.

Key management personnel, defined as Ministers of the Crown that are in Cabinet, are also considered to be related parties.

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 Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Direct Income Tax Revenue (accrual)
Individuals
22,334 22,735 Source deductions 23,345 20,980
4,553 4,986 Other persons 5,071 4,440
(1,102) (1,290) Refunds (1,470) (1,080)
474 521 Fringe benefit tax 522 468
26,259 26,952 Total individuals 27,468 24,808
Corporate Tax
8,222 8,403 Gross companies tax 8,787 8,849
(255) (310) Refunds (242) (296)
1,005 1,653 Non-resident withholding tax 1,506 1,189
102 122 Foreign-source dividend withholding payments 71 149
9,074 9,868 Total corporate tax 10,122 9,891
Other Direct Income Tax
2,340 2,596 Resident withholding tax on interest income 2,699 2,227
92 63 Resident withholding tax on dividend income 69 89
2 3 Estate and gift duties 3 2
2,434 2,662 Total other direct income tax 2,771 2,318
37,767 39,482 Total direct income tax 40,361 37,017
Indirect Income Tax Revenue (accrual)
Goods and Services Tax
19,726 20,655 Gross goods and services tax 20,631 19,540
(8,231) (8,841) Refunds (9,516) (8,325)
11,495 11,814 Total goods and services tax 11,115 11,215
Other Indirect Taxation
1,865 1,880 Customs duty 1,857 1,836
877 867 Road user charges 851 786
903 818 Petroleum fuels excise 819 819
586 573 Alcohol excise 573 553
148 144 Tobacco excise 159 238
215 245 Gaming duties 260 230
219 227 Motor vehicle fees 226 222
64 89 Approved issuer levy and cheque duty 105 94
34 47 Energy resources levies 46 54
4,911 4,890 Total other indirect taxation 4,896 4,832
16,406 16,704 Total indirect taxation 16,011 16,047
54,173 56,186 Total taxation revenue 56,372 53,064
Other Sovereign Revenue (accrual)
2,654 2,770 ACC levies 2,718 2,468
261 285 Fire Service levies 279 268
86 86 EQC levies 86 84
243 268 Child Support 308 242
236 264 Court Fines 262 250
213 178 Other miscellaneous items 226 184
3,693 3,851 Total other sovereign revenue 3,879 3,496
57,866 60,037 Total sovereign revenue 60,251 56,560
Note 2: Tax and Levies Collected through the Crown's Sovereign Power (Cash)
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Direct Income Tax Receipts (cash)
Individuals
22,334 22,676 Source deductions 22,830 21,009
5,430 5,669 Other persons 5,469 5,121
(2,017) (2,238) Refunds (2,171) (1,850)
470 486 Fringe benefit tax 489 482
26,217 26,593 Total individuals 26,617 24,762
Corporate Tax
9,184 9,327 Gross companies tax 9,075 9,120
(1,041) (1,000) Refunds (1,026) (1,153)
981 1,615 Non-resident withholding tax 1,638 1,135
102 122 Foreign-source dividend withholding payments 72 141
9,226 10,064 Total corporate tax 9,759 9,243
Other Direct Income Tax
2,340 2,567 Resident withholding tax on interest income 2,616 2,192
92 63 Resident withholding tax on dividend income 40 90
2 3 Estate and gift duties 2 3
2,434 2,633 Total direct other income tax 2,658 2,285
37,877 39,290 Total direct income tax 39,034 36,290
Indirect Tax Receipts (cash)
Goods and Services Tax
19,354 20,038 Gross goods and services tax 20,085 18,701
(7,877) (8,561) Refunds (8,859) (7,625)
11,477 11,477 Total goods and services tax 11,226 11,076
Other Indirect Taxation
1,865 1,880 Customs duty 1,946 1,778
877 867 Road user charges 851 791
903 818 Petroleum fuels excise 809 835
586 573 Alcohol excise 554 549
148 144 Tobacco excise 160 265
215 245 Gaming duties 238 236
219 227 Motor vehicle fees 223 208
64 89 Approved issuer levy and cheque duty 85 74
35 52 Energy resources levies 42 55
4,912 4,895 Total other indirect taxation 4,908 4,791
16,389 16,372 Total indirect taxation 16,134 15,867
54,266 55,662 Total tax receipts collected 55,168 52,157
Other Sovereign Receipts (cash)
2,561 2,565 ACC levies 2,561 2,408
263 285 Fire Service levies 281 268
86 86 EQC levies 86 84
197 183 Child Support 171 178
156 167 Court Fines 169 160
209 210 Other miscellaneous items 192 126
3,472 3,496 Total other sovereign receipts 3,460 3,224
57,738 59,158 Total sovereign receipts 58,628 55,381

Notes to the Financial Statements (continued)

Note 3: Sales of Goods and Services
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
7,550 6,972 Sales of goods 8,617 6,706
5,703 6,710 Rendering of services 6,782 5,907
13,253 13,682 Total sales of goods and services 15,399 12,613
By source  
1,057 1,161 Core Crown 1,097 1,095
11,928 12,080 Crown entities 12,502 11,322
11,510 11,711 State-owned Enterprises 13,201 10,701
(11,242) (11,270) Inter-segment eliminations (11,401) (10,505)
13,253 13,682 Total sales of goods and services 15,399 12,613
Note 4: Interest Revenue and Dividends
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
132 80 Sovereign receivables 45 66
391 414 Student loans (interest unwind) 407 451
307 329 Other financial assets classified as amortised cost or available
for sale
435 333
320 295 Financial assets classified as held for trading 14 269
1,715 1,746 Financial assets classified as fair value through profit and loss 1,902 1,436
2,865 2,864 Total interest revenue 2,803 2,555
501 339 Dividends 411 440
3,366 3,203 Total interest revenue and dividends 3,214 2,995
By source  
2,587 2,562 Core Crown 2,344 2,580
880 1,085 Crown entities 1,233 756
481 509 State-owned Enterprises 704 484
(582) (953) Inter-segment eliminations (1,067) (825)
3,366 3,203 Total interest revenue and dividends 3,214 2,995
Included in total interest revenue above is interest on
impaired financial assets of:
 
Impaired sovereign receivables 45 44
Impaired student loans 407 451
Impaired other financial assets classified as amortised cost or
available for sale
5 45
Total interest revenue on impaired financial assets 457 540
Note 5: Other Revenue
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
72 99 Sale of royalties 112 89
898 962 Rental income 965 898
1,417 1,830 Other revenue 1,538 1,434
2,387 2,891 Total other revenue 2,615 2,421
Note 6: Transfer Payments and Subsidies
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Social Assistance Grants  
7,292 7,347 New Zealand superannuation 7,348 6,810
1,964 2,081 Family tax credit 1,897 1,699
1,456 1,475 Domestic purposes benefit 1,478 1,468
1,201 1,214 Invalids benefit 1,216 1,132
909 888 Accommodation supplement 891 877
608 580 Sickness benefit 582 573
560 557 In-work tax credit 563 461
475 473 Income related rents 474 440
497 455 Unemployment benefit 458 613
402 384 Student allowances 386 382
279 278 Disability allowances 278 270
1,357 1,360 Other social assistance benefits 1,339 1,291
17,000 17,092 Total social assistance grants 16,910 16,016
Subsidies  
491 1,030 KiwiSaver subsidies 1,102
Other transfer payments  
401 398 Official development assistance 362 330
17,892 18,520 Total transfer payments and subsidies 18,374 16,346

Notes to the Financial Statements (continued)

Note 7: Personnel Expenses
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
14,494 15,035 Salaries and wages 14,948 14,088
637 764 Costs incurred on GSF and other defined benefit plans 711 661
214 195 Costs incurred on SSRSS and other defined contribution plans 274 180
312 428 Other personnel expenses 545 355
15,657 16,422 Total personnel expenses 16,478 15,284
By source  
5,434 5,621 Core Crown 5,584 5,092
8,213 8,624 Crown entities 8,741 8,183
2,011 2,186 State-owned Enterprises 2,164 2,018
(1) (9) Inter-segment eliminations (11) (9)
15,657 16,422 Total personnel expenses 16,478 15,284
Key management personnel compensation  
Salaries and other short-tem employee benefits 7 7
7 7

Key management personnel are Ministers of the Crown who are members of Cabinet.

The Cabinet Manual sets out guidance in respect of Ministers' conduct, public duty, and personal interests. Ministers are responsible for ensuring that no conflict exists or appears to exist between their personal interests and their public duty. Therefore, there is a clear expectation that Ministers will not influence or affect any transactions and outstanding balances between the Government and themselves or their family, whanau, and close associates.

Note 8: Depreciation and Amortisation
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Depreciation expense  
989 1,000 Buildings 980 936
87 89 Electricity distribution network 136 110
276 294 Electricity generation assets 266 228
215 253 Aircraft (excluding military) 166 192
255 256 State highways 302 299
177 177 Rail network 163 149
286 224 Specialist military equipment 222 238
854 816 Other plant and equipment 819 743
16 Specified cultural and heritage assets 20 16
3,139 3,125 Total depreciation expense 3,074 2,911
157 493 Amortisation and impairment of non-financial assets 596 486
3,296 3,618 Total depreciation and amortisation 3,670 3,397
Note 9: Other Operating Expenses
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
Inventory expenses 300 280
2,085 3,061 Donations and ex gratia payments 3,190 2,580
10 6 Fees paid to audit firms (refer below) 3 4
133 1,407 Impairment of financial assets 1,189 2,904
231 215 Impairment of inventory 2 15
412 417 Lottery prize payments 432 414
823 909 Rental and leasing costs 952 907
518 628 Write-down on initial recognition of financial assets 559 629
24,785 22,574 Other operating expenses 24,029 20,109
28,997 29,217 Total other operating expenses 30,656 27,842
By source  
28,785 29,564 Core Crown 29,219 28,951
14,323 13,478 Crown entities 14,391 12,452
8,168 8,353 State-owned Enterprises 9,853 7,363
(22,279) (22,178) Inter-segment eliminations (22,807) (20,924)
28,997 29,217 Total operating expenses 30,656 27,842

Operating expenses relate to those expenses incurred in the course of undertaking the functions and activities of entities included in the Government financial statements, 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 costs is the large residual item. Most of these costs represent payments made for services provided by third parties (roading maintenance for example) or for raw materials (fuel, medicines or inventory for example). They also include other day-to-day operating costs.

Actual
30 June 2008
$m
30 June 2007
$m
Audit related expenses  
Office of the Auditor General fees (including Audit NZ)  
Fees for the audit of financial statements1 30 26
Fees for assurance and related services 1 1
Fees for other services 2 1
Other auditors' fees  
Fees for assurance and related services 1 2
Fees for tax services 1 1
Fees for other services 1 1
Inter-segment eliminations (33) (28)
Fees paid to audit firms 3 4

1 The audit of financial statements are those of the Government reporting entity and its sub-entities.

Notes to the Financial Statements (continued)

Note 10:  Interest Expenses
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
1,671 1,864 Financial liabilities classified as amortised cost 1,297 1,328
17 2 Financial liabilities classified as held for trading 1 11
647 1,064 Financial liabilities classified as fair value through profit and loss 1,717 1,528
413 24 Interest unwind on provisions 86 18
2,748 2,954 Total interest expenses 3,101 2,885
By source  
2,245 2,527 Core Crown 2,460 2,330
306 275 Crown entities 248 265
704 734 State-owned Enterprises 870 685
(507) (582) Inter-segment eliminations (477) (395)
2,748 2,954 Total interest expenses 3,101 2,885
Note 11:  Insurance Expenses
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By entity  
2,965 4,001 Accident Compensation 3,423 2,880
37 82 Earthquake Commission 130 77
8 12 Other 10 18
3,010 4,095 Total insurance expenses 3,563 2,975
By type  
Claims expense 5,257 3,590
Outwards reinsurance premium expense 36 31
Movement in unexpired risk liability 298 115
Other underwriting expenses 93 83
Total claims and other expenses 5,684 3,819
less actuarial gain/(loss) (1,709) (481)
less operating costs relating to claims (412) (363)
Total insurance expenses (excl gains/losses and operations) 3,563 2,975

Claims expense is the sum of claims settled 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 (e.g. costs for processing claims and injury prevention promotion) which due to their nature are reported elsewhere in the statement of financial performance eg. under gains/losses or personnel expenses.

Insurance expenses represents underwriting expenses less those expenses reported elsewhere i.e. 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
30 June 2008
$m
30 June 2007
$m
Net Underwriting Result  
Premium revenue 2,804 2,552
Recoveries revenue (inc reinsurance recovery)
Underwriting revenue 2,804 2,552
Less claims and other expenses (5,684) (3,819)
Net underwriting surplus/(deficit) (2,880) (1,267)

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.

Actual
30 June 2008
$m
30 June 2007
$m
Operating cash flows associated with the underwriting result are:  
Cash receipts 2,647 2,492
Cash payments (3,041) (2,776)
Net operating cash flows (394) (284)

Notes to the Financial Statements (continued)

Note 12:  Gains and Losses on Financial Instruments
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type
1 12 Foreign exchange gains on financial assets measured at amortised cost 70 -
1 Foreign exchange losses on financial assets measured at amortised cost - (136)
282 (426) Change in fair value of financial assets classified as held for trading (18) 146
4 (6) Gain/(loss) on disposal of financial assets classified at amortised cost (5) (39)
899 (1,007) Change in fair value of financial assets classified as fair value through profit and loss (226) (5,162)
1,186 (1,426) Net gains/(losses) on financial assets (179) (5,191)
1 Foreign exchange gains on financial liabilities measured at amortised cost 2 156
(116) Foreign exchange losses on financial liabilities measured at amortised cost (148) (2)
(2) Change in fair value of financial liabilities classified as held for trading (2) 58
Gain/(loss) on disposal of financial liabilities classified at amortised cost (7) (1)
(329) Change in fair value of financial liabilities classified as fair value through profit and loss (591) 913
(446) Net gains/(losses) on financial liabilities (746) 1,124
191 1,048 Net gains/(losses) on derivatives 308 5,632
1,377 (824) Net gains/(losses) on financial instruments (617) 1,565
By source
1,155 200 Core Crown 353 1,179
485 (691) Crown entities (743) 365
18 (138) State-owned Enterprises (37) 63
(281) (195) Inter-segment eliminations (190) (42)
1,377 (824) Net gains/(losses) on financial instruments (617) 1,565
Note 13:  Gains and Losses on Non-Financial Instruments
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
(29) Foreign exchange gains/(losses) (91) (5)
(906) Actuarial gains/(losses) on GSF liability (1,098) 1,133
(1,059) Actuarial gains/(losses) on ACC outstanding claims (1,709) (481)
(98) Other gains/(losses) on non-financial liabilities (183) (3)
(46) Gains/(losses) on sale or disposals of property, plant and equipment (1) (323)
129 Gains/(losses) on agricultural assets 130 144
Gains/(losses) on intangible assets 18 (2)
2 Other gains/(losses) on non-financial assets 9 23
(2,007) Net gains/(losses) on non-financial instruments (2,925) 486
By source  
(1,057) Core Crown (1,369) 1,163
(1,078) Crown entities (1,725) (495)
128 State-owned Enterprises 170 (181)
Inter-segment eliminations (1) (1)
(2,007) Net gains/(losses) on non-financial instruments (2,925) 486

The GSF and ACC liabilities are valued by an independent actuary (refer notes 24 and 25). Actuarial gains/(losses) represent differences between actual results and what the actuary had assumed when originally calculating the liability. They are also known as experience adjustments.

Notes to the Financial Statements (continued)

Note 14:  Receivables
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
7,078 6,005 Tax receivables 7,398 6,369
2,843 3,171 Levies, fines and penalty receivables 3,106 2,589
217 344 Social benefit receivables 440 394
2,409 2,806 Trade and other receivables 3,214 2,705
12,547 12,326 Total receivables 14,158 12,057
By maturity  
12,121 11,758 Expected to be realised within one year 13,564 11,431
426 568 Expected to be held for more than one year 594 626
12,547 12,326 Total receivables 14,158 12,057
By source  
8,285 7,108 Core Crown 9,031 7,590
3,507 4,260 Crown entities 4,444 3,687
1,647 1,744 State-owned Enterprises 2,247 1,729
(892) (786) Inter-segment eliminations (1,564) (949)
12,547 12,326 Total receivables 14,158 12,057

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.

Actual
30 June 2008
$m
30 June 2007
$m
Tax Receivables  
Gross tax receivable 10,423 9,151
Impairment of tax receivables (3,025) (2,782)
Total tax receivables 7,398 6,369
Gross Tax Receivable  
Current 6,218 5,646
Past due 4,205 3,505
Total gross tax receivable 10,423 9,151
% past due 40% 38%
Impairment of tax receivables  
Balance at beginning of the year 2,782 984
Impairment losses recognised on receivables 944 2,581
Amounts written off as uncollectible (701) (783)
Balance at end of the year 3,025 2,782
Note 14:  Receivables (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Ageing of tax receivables past due  
Less than six months 1,458 960
Between six months and one year 458 365
Between one year and two years 701 755
Greater than two years 1,588 1,425
Tax receivables past due 4,205 3,505

The Inland Revenue Department (IRD) administers the majority of the tax receivable portfolio. The recoverable amount of the portfolio administered by IRD 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 use of money interest (UOMI) rate. If the recoverable amount of the IRD portfolio is less than the carrying amount, the carrying amount is reduced to the recoverable amount.

Actual
30 June 2008
$m
30 June 2007
$m
The estimated recoverable amount of this portfolio and key
assumptions underpinning the valuation are:
 
Recoverable amount of tax receivables current 6,218 5,646
Recoverable amount of tax receivables past due 1,180 723
Discount rate (UOMI) 14.24% 14.24%
Impact on recoverable amount of a 2% increase in discount rate (18) (19)
Impact on recoverable amount of a 2% decrease in discount rate 19 21

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

The fair value of tax receivables is not materially different from the carrying value.

Notes to the Financial Statements (continued)

Note 14:  Receivables (continued)

Actual

30 June 2008
$m
30 June 2007
$m
Levies, fines and penalty receivables  
Gross ACC levy receivables 2,895 2,425
Gross other levies, fines and penalty receivables 1,529 1,321
Total gross levies, fines and penalty receivables 4,424 3,746
Impairment of ACC levy receivables (73) (73)
Impairment of other levies, fines and penalty receivables (1,245) (1,084)
Total impairment of receivables (1,318) (1,157)
Total levies, fines and penalty receivables 3,106 2,589
Impairment of ACC levy receivables  
Balance at beginning of the year 73 71
Impairment losses recognised on receivables 1 3
Amounts written off as uncollectible (1) (1)
Balance at end of the year 73 73
Collective impairment allowance 73 73
Individual impairment allowance    -     - 
Balance at end of the year 73 73
Impairment of other levies, fines and penalty receivables  
Balance at beginning of the year 1,084 989
Impairment losses recognised on receivables 206 116
Amounts written off as uncollectible (45) (21)
Balance at end of the year 1,245 1,084
Collective impairment allowance 1,245 1,084
Individual impairment allowance    -     - 
Balance at end of the year 1,245 1,084
Ageing of levies, fines and penalty receivables past due but not impaired  
Less than six months 20 16
Between six months and one year
Greater than one year
Total levies, fines and penalty receivables past due but not impaired 20 16

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 $206 million (2007: $195 million). Their carrying amount provides a reasonable approximation of their fair value. The carrying value of these Justice receivables is calculated using discounted cash flows (net of estimated service costs).

Note 14:  Receivables (continued)

Actual

30 June 2008
$m
30 June 2007
$m
Social benefit receivables  
Gross social benefit receivables 942 842
Impairment of social benefit receivables (502) (448)
Total social benefit receivables 440 394
Impairment of social benefit receivables  
Balance at beginning of the year 448 446
Impairment losses recognised on receivables 49 2
Amounts written off as uncollectible 5
Balance at end of the year 502 448
Collective impairment allowance 502 488
Individual impairment allowance    -     - 
Balance at end of the year 502 488
Ageing of social benefit receivables past due but not impaired  
Less than six months 4
Between six months and one year
Greater than one year
Total social benefit receivables past due but not impaired 4

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 $374 million (2007: $375 million). Their carrying amount provides a reasonable approximation of their fair value. The carrying value of these receivables is calculated using forecast discounted cash flows (net of estimated service costs).

Note 14: Receivables (continued)

Actual

30 June 2008
$m
30 June 2007
$m
Trade and other receivables  
Gross trade and other receivables 3,258 2,775
Impairment of trade and other receivables (44) (70)
Total trade and other receivables 3,214 2,705
Impairment of trade and other receivables  
Balance at beginning of the year 70 53
Impairment losses recognised on receivables 10 14
Amounts written off as uncollectible (32) 3
Impairment losses reversed (4)
Balance at end of the year 44 70
Collective impairment allowance 42 70
Individual impairment allowance 2    - 
Balance at end of the year 44 70
Ageing of trade and other receivables past due but not impaired  
Less than six months 183 423
Between six months and one year 13 8
Greater than one year 4 7
Total trade and other receivables past due but not impaired 200 438

Most trade and other receivables are short term, with $2,974 million (2007: $2,324 million) expected to be settled in the next year. Their carrying amount provides a reasonable approximation of their fair value.

Notes to the Financial Statements (continued)

Note 15:  Marketable securities, deposits and derivatives in gain
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
32,421 33,306 Marketable securities 36,651 27,481
2,037 1,741 Long term deposits 2,787 3,174
464 1,167 Derivatives in gain 1,563 2,352
212 151 IMF special drawing rights 188 183
35,134 36,365 Total marketable securities, deposits and derivatives in gain 41,189 33,190
By maturity  
30,127 34,460 Expected to be realised within one year 37,431 31,600
5,007 1,905 Expected to be held for more than one year 3,758 1,590
35,134 36,365 Total marketable securities, deposits and derivatives in gain 41,189 33,190
By source  
27,859 28,809 Core Crown 32,108 26,291
11,595 10,210 Crown entities 10,790 9,881
1,296 2,124 State-owned Enterprises 3,029 2,150
(5,616) (4,778) Inter-segment eliminations (4,738) (5,132)
35,134 36,365 Total marketable securities, deposits and derivatives in gain 41,189 33,190

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 where 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
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By maturity  
12,590 8,624 Expected to be realised within one year 8,934 9,401
4,396 3,912 Expected to be held for more than one year 4,030 4,180
16,986 12,536 Total share investments 12,964 13,581
By source  
10,734 7,133 Core Crown 7,340 7,755
6,174 5,373 Crown entities 5,583 5,784
84 67 State-owned Enterprises 63 85
(6) (37) Inter-segment eliminations (22) (43)
16,986 12,536 Total share investments 12,964 13,581

Share investments are reported at fair value. The fair value of listed share investments are based on quoted market price. 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.

Notes to the Financial Statements (continued)

Note 17:  Advances
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
6,252 6,278 Student loans 6,741 6,011
5,127 5,751 Kiwibank mortgages 5,581 3,637
1,459 1,878 Other advances 626 1,080
12,838 13,907 Total advances 12,948 10,728
By source  
10,788 11,140 Core Crown 10,278 9,087
419 433 Crown entities 434 376
5,194 6,052 State-owned Enterprises 5,857 4,486
(3,563) (3,718) Inter-segment eliminations (3,621) (3,221)
12,838 13,907 Total advances 12,948 10,728

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

Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Student Loans  
9,983 10,012 Nominal value1 9,573 9,413
3,731 3,734 Write-down on initial recognition and impairment 2,832 3,402
6,252 6,278 Total student loans 6,741 6,011
Gross carrying value 7,044 6,544
Impairment of student loans (303) (533)
Total student loans 6,741 6,011
Expected to be repaid within one year 630 628
Expected to be held for more than one year 6,111 5,383
Total student loans 6,741 6,011
Movement during the year  
5,761 6,011 Opening balance 6,011 5,569
1,278 1,210 Amount borrowed in current year 1,201 1,176
(526) (487) Less initial write down to fair value (487) (488)
(621) (611) Repayments made during the year (629) (555)
391 414 Interest unwind 407 451
(31) (260) (Impairment)/reversal of impairment 231 (151)
1 Other movements 7 9
6,252 6,278 Closing balance student loans 6,741 6,011

1. The nominal loan balance for 2008 excludes accrued interest whereas in the prior year the nominal balance included accrued interest of $493 million. Accrued interest is written off each year when certain criteria are met. On review of the nominal balance it was concluded that it was more appropriate to exclude the accrued interest from the disclosure of the nominal balance as this will be written off for New Zealand based borrowers.

Note 17:  Advances (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Impairment allowance of student loans  
Balance at beginning of the year 533 382
Impairment losses recognised on receivables 151
Impairment losses reversed (230)
Balance at end of the year 303 533

The carrying value of student loans reflects current student loans policy. It is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macro economic factors such as inflation and the discount rates used to determine the effective interest on new borrowers. The data for student loans has been integrated from files provided by the Inland Revenue Department, Ministry of Social Development and the Ministry of Education. The current data used for the valuation model is up to 31 March 2007, and contains information on borrowings, repayments, income, educational factors and socio-economic factors. This integrated data has been supplemented by less detailed, but more recent data to value student loans at balance date. Given the lead time required to compile and analyse the integrated data, it is expected that there is a lag between the availability of this data set and balance date.

Actual
30 June 2008
$m
30 June 2007
$m
Significant assumptions behind the carrying value are:  
Effective interest rate 8.4% 7.1%
Interest rate applied to loans for overseas borrowers 6.7%-6.8% 6.7%-7.2%
CPI 2.5%-4.0% 2.4%-2.6%
Future salary inflation 3.5%-4.7% 3.4%-3.6%
The estimated fair value of the student loan portfolio and key assumptions
underpinning the fair valuation are:
 
Fair value 5,521 5,443
Fair value discount rate 9.2% 7.8%
Impact on fair value of a 1% increase in discount rate (321) (232)
Impact on fair value of a 1% decrease in discount rate 366 258

Fair value is the amount for which the loan book value could be exchanged between knowledgeable, willing parties in an arm's-length transaction as at 30 June 2008. It is determined by discounting the cash flows at an appropriate discount rate.

Fair values will differ from carrying values due to changes in market interest rates, as the carrying value is not adjusted for such changes whereas the fair value was calculated on a discount rate that was current at 30 June 2008. At that date the fair value was calculated on a discount rate of 9.19% whereas a weighted average discount rate of 6.56% was used for the carrying value. Therefore, the difference between fair value and carrying 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.

Notes to the Financial Statements (continued)

Note 17: Advances (continued)
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Kiwibank Mortgages  
By maturity  
Expected to be repaid within one year 619 308
Expected to be held for more than one year 4,962 3,329
5,127 5,751 Total Kiwibank mortgages 5,581 3,637
Ageing of Kiwibank mortgages past due but not impaired  
Less than six months 26 9
Between six months and one year
Greater than one year
Total Kiwibank mortgages past due but not impaired 26 9
Measurement basis for Kiwibank mortgages  
Kiwibank mortgages measured at amortised cost 2,427 885
Kiwibank mortgages measured at fair value 3,154 2,752
Total Kiwibank mortgages 5,581 3,637

Kiwibank mortgages originating from 1 January 2008 are measured at amortised cost. 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 $2,428 million (2007: $878 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.

The carrying value of Kiwibank mortgages will be affected by changes in interest rates. Such changes may be specific to these assets (i.e. changes to credit risk on these assets) and broader market sentiment changes. The following table identifies changes in fair value attributable to credit risk alone for the current period and cumulatively for the life of the assets. It also identifies the extent that credit derivatives are used to manage credit exposure:

Actual
30 June 2008
$m
30 June 2007
$m
Credit risk exposure for Kiwibank Mortgages  
Fair value impact for the year from changes in credit risk 3 2
Cumulative fair value impact from changes in credit risk 1 2
Note 17: Advances (continued)
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Other Advances  
By maturity  
1,047 1,361 Expected to be repaid within one year 71 97
412 517 Expected to be held for more than one year 555 983
1,459 1,878 Total other advances 626 1,080
Impairment of other advances  
Balance at beginning of the year 38 16
Impairment losses recognised on receivables 214 37
Amounts written off as uncollectible (2) (15)
Balance at end of the year 250 38
Collective impairment allowance 213 1
Individual impairment allowance 37 37
Balance at end of the year 250 38
Measurement basis for other advances  
484 599 Other advances measured at amortised cost 578 553
975 1,279 Other advances measured at fair value 48 527
1,459 1,878 Total other advances 626 1,080

The fair value of other advances measured at amortised cost is $553 million (2007: $550 million). There are no advances past due but not impaired (2007: $nil).

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

Notes to the Financial Statements (continued)

Note 18:  Inventory
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type
    Inventories held for sale 43 39
    Military inventories 254 240
    Other consumables 667 547
982 933 Total inventory 964 826
    By maturity    
792 726 Expected to be sold or consumed within one year 758 645
190 207 Expected to be sold or consumed after one year 206 181
982 933 Total inventory 964 826
    By source    
372 375 Core Crown 392 347
129 145 Crown entities 182 131
481 413 State-owned Enterprises 390 348
  Inter-segment eliminations
982 933 Total inventory 964 826
Note 19:  Other Assets
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type
262 253 Prepayments 379 302
93 83 Investment property 99 101
747 768 Agricultural assets 732 743
287 254 Investment in supranational organisations 268 244
103 67 Other 185 137
1,492 1,425 Total other assets 1,663 1,527
    By maturity    
399 367 Expected to be realised within one year 608 459
1,093 1,058 Expected to be held for more than one year 1,055 1,068
1,492 1,425 Total other assets 1,663 1,527
    By source    
1,031 919 Core Crown 982 960
123 108 Crown entities 147 113
345 446 State-owned Enterprises 549 481
(7) (48) Inter-segment eliminations (15) (27)
1,492 1,425 Total other assets 1,663 1,527

Notes to the Financial Statements (continued)

Note 20: Property, Plant and Equipment
Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June
2008
$m
30 June
2007
$m
By Class of asset  
Net Carrying Value  
15,004 16,750 Land (valuation) 17,609 16,473
21,349 21,368 Buildings (valuation) 22,257 20,777
2,219 2,060 Electricity distribution network (cost) 1,887 1,972
10,057 11,059 Electricity generation assets (valuation) 11,202 10,402
2,064 1,955 Aircraft (excluding military) (valuation) 2,071 2,104
19,415 20,220 State highways (valuation) 20,947 19,400
10,804 10,581 Rail network (valuation) 11,621 10,568
3,628 3,157 Specialist military equipment (valuation) 3,345 3,079
5,882 4,146 Other plant and equipment (cost) 4,412 3,805
5,528 7,059 Specified cultural and heritage assets (valuation) 7,978 7,018
95,950 98,355 Total property, plant and equipment 103,329 95,598
By source  
26,492 26,458 Core Crown 28,637 26,215
40,327 42,683 Crown entities 43,659 41,296
29,131 29,214 State-owned Enterprises 31,033 28,087
Inter-segment eliminations
95,950 98,355 Total property, plant and equipment 103,329 95,598
By holding  
1,141 1,019 Leasehold 1,235 1,146
94,809 97,336 Freehold 102,094 94,452
95,950 98,355 Total property, plant and equipment 103,329 95,598
Property, plant and equipment pledged to secure borrowing 1,593 1,384

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 judgments 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 2008
$m
30 June 2007
$m
Cost or Valuation  
Opening balance 103,787 96,122
Additions 5,226 5,215
Disposals (677) (721)
Acquisitions through business combinations 58 51
Net revaluations 4,120 3,323
Net foreign currency exchange differences 7 (20)
Other (93) (183)
Total cost or valuation 112,428 103,787
Accumulated Depreciation  
Opening balance 8,189 6,999
Eliminated on disposal (373) (387)
Eliminated on revaluation (1,680) (1,041)
Impairment losses charged to operating balance 5    - 
Reversals of impairment losses charged to operating balance (13) (5)
Depreciation expense 3,074 2,911
Net foreign currency exchange differences 13 (213)
Other (116) (75)
Total accumulated depreciation 9,099 8,189
Total property, plant and equipment 103,329 95,598
Land (valuation)  
Opening balance 16,473 14,579
Additions 250 309
Disposals (66) (69)
Net revaluations 1,036 1,635
Net foreign currency exchange differences 1
Other (85) 19
Carrying value of land 17,609 16,473
By holding  
Leasehold 2
Freehold 17,609 16,471
Carrying value of land 17,609 16,473

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.

Notes to the Financial Statements (continued)

Note 20:  Property, Plant and Equipment (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Buildings (valuation)  
Opening balance 21,936 21,357
Additions 1,436 1,118
Disposals (65) (120)
Acquisitions through business combinations 1
Net revaluations 354 (359)
Net foreign currency exchange differences 1 (13)
Other (4) (47)
Total buildings (valuation) 23,659 21,936
Accumulated Depreciation and Impairment on Buildings  
Opening balance 1,159 1,140
Eliminated on disposal (50) 3
Eliminated on revaluation (645) (682)
Reversals of impairment losses charged to operating balance (7) (3)
Depreciation expense 980 936
Net foreign currency exchange differences 1
Other (36) (235)
Accumulated depreciation and impairment on buildings 1,402 1,159
Carrying value of buildings 22,257 20,777
By holding  
Leasehold 247 132
Freehold 22,010 20,645
Carrying value of buildings 22,257 20,777

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.

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

Land and buildings 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 2008.

15,103

(2007:  14,751)

School property Quotable Value NZ Limited or experienced ministry staff (reviewed by Quotable Value) Valuations based on market evidence where possible, or depreciated replacement cost. Annual valuation cycle.  Latest valuation completed as at 30 June 2008. 

10,466

(2007:  9,705)

Corrections Land and Buildings Valuersnet.nz Limited  The last full valuation was based on market evidence, except for prison buildings, which were valued at optimised depreciated replacement cost.  A desktop valuation was undertaken during 2007/08 to ensure that the value of the assets had not materially changed since the last full valuation.  Two-year valuation cycle.  Latest full valuation completed as at 30 June 2007. 

1,648

(2007:  1,689)

NZ Defence Force Land and Buildings Beca Valuations Limited Valuations were based on market evidence or rating valuations. Five-year valuation cycle.  Latest full valuation completed as at 31 December 2007.

1,634

(2007:  1,290)

Landcorp Land and Buildings Quotable Value NZ Limited Valuations based on market evidence where possible. Annual valuation cycle.  Latest valuation completed as at 30 June 2008.

1,322

(2007:  1,099)

Land Information NZ Managed Properties Quotable Value NZ Limited (rated property) and experienced department staff (non-rated property) (reviewed by Telfer Young) Valuations were based on market evidence or discounted cash flows from licence and rental agreements. Annual valuation cycle.  Latest valuation completed as at 30 June 2008. 

769

(2007:  692)

Notes to the Financial Statements (continued)

Note 20: Property, Plant and Equipment (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Electricity Distribution Network (cost)  
Opening balance 2,369 2,306
Additions 46 75
Disposals (12)
Total electricity distribution network (cost) 2,415 2,369
Accumulated Depreciation and Impairment on Electricity Distribution Network  
Opening balance 397 299
Eliminated on disposal (5) (12)
Depreciation expense 136 110
Accumulated depreciation and impairment on electricity distribution network 528 397
Carrying value of electricity distribution network 1,887 1,972
By holding  
Leasehold
Freehold 1,887 1,972
Carrying value of electricity distribution network 1,887 1,972
Electricity Generation Assets (valuation)  
Opening balance 10,674 8,635
Additions 573 546
Disposals (2) (40)
Net revaluations 640 1,356
Other (354) 177
Total electricity generation assets 11,531 10,674
Accumulated Depreciation and Impairment on Electricity Generation Assets  
Opening balance 272 142
Eliminated on disposal (101)
Eliminated on revaluation (196)
Depreciation expense 266 228
Other (13) 3
Accumulated depreciation and impairment on electricity generation assets 329 272
Carrying value of electricity generation assets 11,202 10,402
By holding  
Leasehold 4 24
Freehold 11,198 10,378
Carrying value of electricity generation assets 11,202 10,402

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

Note 20: Property, Plant and Equipment (continued)
Entity Valuer/Reviewer Approach Timing

Carrying value

 ($m)

Genesis Power Limited Directors' valuation based on an independent review of cash flows by First NZ Capital Valuations based on net present value of future earnings of the assets on an existing use basis, excluding disposal and restoration costs. Five-year valuation cycle.  Latest valuation completed as at 30 June 2005.

1,817

(2007: 1,611)

Meridian Energy 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. Five-year valuation cycle.  Latest valuation completed as at 30 June 2007.

6,316

(2007: 6,215)

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. Five-year valuation cycle.  Hydro and co-generation assets were last valued as at 30 June 2008.  Geothermal and landfill assets were last valued as at 30 June 2005.

2,981

(2007:  2,473)

Notes to the Financial Statements (continued)

Note 20: Property, Plant and Equipment (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Aircraft (excluding military) (valuation)  
Opening balance 2,165 2,061
Additions 112 397
Disposals (2) (100)
Acquisitions through business combinations 11
Net revaluations (204) (414)
Other (9) 221
Total aircraft (excluding military) 2,073 2,165
Accumulated Depreciation and Impairment on Aircraft  
Opening balance 61
Eliminated on disposal (1) (28)
Eliminated on revaluation (224)
Depreciation expense 166 192
Net foreign currency exchange differences (102)
Other (1)
Accumulated depreciation and impairment on aircraft 2 61
Carrying value of aircraft (excluding military) 2,071 2,104
By holding  
Leasehold 935 914
Freehold 1,136 1,190
Carrying value of aircraft (excluding military) 2,071 2,104

Aircraft and related assets are valued annually. Independent valuations as at 30 June 2008 have been obtained from The Aircraft Value Analysis Company and Ascend Worldwide Limited (previously named Airclaims 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.

The related assets include spare engines and flight simulators.

Note 20: Property, Plant and Equipment (continued)
Actual
30 June 2008
$m
30 June 2007
$m
State Highways (valuation)  
Opening balance 19,400 17,930
Additions 1,012 912
Disposals (26) (27)
Net revaluations 561 586
Other    -  (1)
Total state highways 20,947 19,400
Accumulated Depreciation and Impairment on State Highways  
Opening balance
Eliminated on revaluation (302) (298)
Depreciation expense 302 299
Other (1)
Accumulated depreciation and impairment on state highways
Carrying value of state highways 20,947 19,400
By holding  
Leasehold
Freehold 20,947 19,400
Carrying value of state highways 20,947 19,400

State highways comprise the land, formation works, road structure, drainage works and traffic facilities of the roads, plus 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 DTZ New Zealand Limited. The State Highways are subject to a full revaluation on a cyclical basis as at 30 June so that each region is revalued at an interval not exceeding five years. Those regions that are not subject to a full revaluation in a particular year are subject to a valuation update by an independent valuer through the use of price indices. This ensures that the carrying amount of state highways does not differ materially from that which would be determined if a full valuation was done each year.

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. Borrowing costs have not been capitalised.

Notes to the Financial Statements (continued)

Note 20:  Property, Plant and Equipment (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Rail Network (valuation)  
Opening balance 10,721 10,561
Additions 242 277
Disposals (8) (118)
Net revaluations 1,051
Other (72) 1
Total rail network 11,934 10,721
Accumulated Depreciation and Impairment on Rail Network  
Opening balance 153
Eliminated on disposal (3) 4
Depreciation expense 163 149
Accumulated depreciation and impairment on rail network 313 153
Carrying value of rail network 11,621 10,568
By holding  
Leasehold
Freehold 11,621 10,568
Carrying value of rail network 11,621 10,568

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.

Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date.

Valuations are undertaken in accordance with the standards issued by the New Zealand Property Institute. Land and buildings were valued at 30 June 2008 by DTZ New Zealand Limited. The last valuation of rail infrastructure assets was as at 1 July 2006 and was also conducted by DTZ New Zealand Limited.

Railway infrastructure assets and specialised land and buildings are valued using Depreciated Replacement Cost (optimised). 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. Borrowing costs have not been capitalised.

Note 20: Property, Plant and Equipment (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Specialist Military Equipment (valuation)  
Opening balance 3,652 3,550
Additions 336 295
Disposals (16) (28)
Net revaluations (164) (163)
Other    -  (2)
Total specialist military equipment 3,808 3,652
Accumulated Depreciation and Impairment on
Specialist Military Equipment
 
Opening balance 573 344
Eliminated on disposal (13) (25)
Eliminated on revaluation (330) 8
Depreciation expense 222 238
Net foreign currency exchange differences 10 9
Other 1 (1)
Accumulated depreciation and impairment on
specialist military equipment
463 573
Carrying value of specialist military equipment 3,345 3,079
By holding  
Leasehold
Freehold 3,345 3,079
Carrying value of specialist military equipment 3,345 3,079

Specialist Military Equipment (SME) assets are subject to revaluation with sufficient regularity to ensure that the carrying amount does not differ materially from fair value and at least once every five years. Valuations use a market based approach, except where reliable market evidence is unavailable and then Optimised Depreciated Replacement Cost (ODRC) is used to calculate fair value. The carrying values of revalued items are reviewed at each balance date to ensure that those values are not materially different to fair value.

Specialist Military Equipment with a net carrying value of $2 million or more, or groups of like assets with a total carrying value of $4 million or more are revalued annually using an internally assessed valuation. All other SME is stated at depreciated replacement cost based on a historic internal valuation or depreciated historical cost.

The internally assessed valuation for SME is reviewed by an independent registered valuer (Beca Valuations Limited).

Notes to the Financial Statements (continued)

Note 20:  Property, Plant and Equipment (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Other Plant and Equipment (cost)  
Opening balance 9,066 9,690
Additions 1,099 1,268
Disposals (464) (207)
Acquisitions through business combinations 46 51
Net revaluations (1)
Net foreign currency exchange differences 5 (7)
Other 404 (1,729)
Total other plant and equipment 10,155 9,066
Accumulated Depreciation and Impairment on Other
Plant and Equipment
 
Opening balance 5,261 5,074
Eliminated on disposal (286) (212)
Eliminated on revaluation 15 (69)
Impairment losses charged to operating balance 5
Reversals of impairment losses charged to operating balance (6) (14)
Depreciation expense 819 743
Net foreign currency exchange differences 2 (128)
Other (67) (133)
Accumulated depreciation and impairment on other
plant and equipment
5,743 5,261
Carrying value of other plant and equipment 4,412 3,805
By holding  
Leasehold 49 75
Freehold 4,363 3,730
Carrying value of other plant and equipment 4,412 3,805
Specified Cultural and Heritage Assets (valuation)  
Opening balance 7,331 5,453
Additions 120 18
Disposals (28)
Net revaluations 847 682
Other 27 1,178
Total specified cultural and heritage assets 8,297 7,331
Note 20:  Property, Plant and Equipment (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Accumulated Depreciation and Impairment on Specified
Cultural and Heritage Assets
 
Opening balance 313
Eliminated on disposal (15) (16)
Eliminated on revaluation 2
Reversals of impairment losses charged to operating balance 12
Depreciation expense 20 16
Net foreign currency exchange differences 8
Other (1) 293
Accumulated depreciation and impairment on specified
cultural and heritage assets
319 313
Carrying value of specified cultural and heritage assets 7,978 7,018
By holding  
Leasehold
Freehold 7,978 7,018
Carrying value of specified cultural and heritage assets 7,978 7,018
By group  
National Archives 506 564
National Library 1,004 881
Conservation property 5,787 4,939
Parliament Library 35 34
Te Papa 641 598
Other 5 2
Carrying value of specified cultural and heritage assets 7,978 7,018

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 Archives New Zealand have been valued and recorded at a best estimate of fair value as at 30 June 2008. Determination of the fair value was based on a valuation by Dunbar Sloane in June 2008 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.

The value of the Treaty of Waitangi was based on a valuation as at 30 June 2008, supported by Sotheby's, independent valuer. The values of other items of exceptional value were based on a valuation from Dunbar Sloane, also obtained in June 2008. 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. 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. The valuation was performed by National Library staff as at 30 June 2008, with the valuation methodology reviewed by an independent valuer (Rowan Gibbs of Smiths Books). 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 (national parks, forest parks, conservation areas) and recreational facilities. The Conservation Estate valuation at 30 June 2008 was based on rateable valuations prepared by Quotable Value New Zealand and independently reviewed by valuersnet.nz

The Department of Conservation recreational facilities were recorded at their fair valuation. The recreational facilities are subject to an asset management plan and are recorded in the Visitor Assets Management System (VAMS).

The fences that border Conservation Estate areas or form part of the recreational facilities have been valued on a depreciated replacement cost basis. The valuation methodology has been reviewed by an independent valuer.

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 or treaty claims. 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 was valued at 30 June 2008 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 valued 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 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 collections were valued by Robin Watt & Associates, cultural and forensic specialists.

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 as being of significant importance and as such have covenants attached to them restricting an Institute's ability to deal with them.

Notes to the Financial Statements (continued)

Note 21:  Equity Accounted Investments

Note 21:  Equity Accounted Investments
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
5,989 6,588 Tertiary Education Institutions 7,037 6,310
658 931 Other 1,028 691
6,647 7,519 Total equity accounted investments 8,065 7,001

Tertiary Education Institutions (TEIs)

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

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

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

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

Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Operating Results  
1,941 1,994 Revenue from Crown 2,018 1,811
1,989 1,830 Other revenue 1,912 1,794
(3,867) (3,703) Expenses (3,705) (3,497)
63 121 Net surplus 225 108
Net worth  
Assets  
885 1,000 Financial assets 766 1,000
6,125 6,735 Property, plant and equipment 6,928 6,458
326 297 Other assets 692 296
7,336 8,032 Total assets 8,386 7,754
Liabilities  
259 223 Borrowings 176 223
1,088 1,221 Other liabilities 1,173 1,221
1,347 1,444 Total liabilities 1,349 1,444
5,989 6,588 Net worth 7,037 6,310

Note 22:  Payables

Note 22:  Payables
Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
5,556 5,244 Accounts payable 6,444 4,898
3,480 3,179 Taxes repayable 4,451 3,179
9,036 8,423 Total payables 10,895 8,077
By maturity  
8,684 8,086 Expected to be settled within one year 10,707 7,773
352 337 Expected to be outstanding for more than one year 188 304
9,036 8,423 Total payables 10,895 8,077
By source  
5,317 5,256 Core Crown 7,425 5,334
4,276 3,917 Crown entities 4,042 4,169
3,447 4,124 State-owned Enterprises 4,877 3,719
(4,004) (4,874) Inter-segment eliminations (5,449) (5,145)
9,036 8,423 Total payables 10,895 8,077

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.

Inland Revenue repays taxes repayable as appropriate. The dates are aimed to be those that maximise credit use-of-money interest, or minimise the differential use-of-money interest for taxpayers within the constraints of the tax rules. The carrying value is a reasonable approximation of the fair value for taxes repayable.

Notes to the Financial Statements (continued)

Note 23:  Borrowings
Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June 2008
$m
30 June 2007
$m
By type  
17,732 18,683 Government stock 18,516 15,778
2,786 1,389 Treasury bills 1,484 2,098
358 386 Government retail stock 423 364
7,523 7,465 Settlement deposits with Reserve Bank 7,750 7,507
300 780 Derivatives in loss 1,591 1,126
958 1,251 Finance lease liabilities 955 954
16,707 15,592 Other borrowings 15,391 14,071
46,364 45,546 Total borrowings 46,110 41,898
By source  
38,876 37,034 Core Crown 37,167 35,885
4,773 4,650 Crown entities 4,705 4,430
12,155 12,608 State-owned Enterprises 12,817 10,293
(9,440) (8,746) Inter-segment eliminations (8,579) (8,710)
46,364 45,546 Total borrowings 46,110 41,898
By maturity  
26,862 24,342 Expected to be settled within one year 21,610 19,973
19,502 21,204 Expected to be outstanding for more than one year 24,500 21,925
46,364 45,546 Total borrowings 46,110 41,898

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.

Except for sums 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, 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.

Note 23: Borrowings (continued) Government Stock
Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June 2008
$m
30 June 2007
$m
11,044 13,202 Government stock measured at amortised cost 13,722 12,873
6,688 5,481 Government stock measured at fair value 4,794 2,905
17,732 18,683 Total Government stock 18,516 15,778

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 $13,778 million (2007: $12,561 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 international credit rating for New Zealand accordingly changes in fair value are due to factors other than Sovereign credit risk.

Actual
30 June 2008
$m
30 June 2007
$m
Government stock measured at fair value  
Carrying value 4,794 2,905
Amount payable on maturity 5,608 4,281

Treasury Bills

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

Settlement Deposits with Reserve Bank

Settlement deposits with the Reserve Bank represent the level of money deposited with the Reserve Bank by commercial banks. It is a liquidity mechanism used to settle wholesale obligations between the banks and provides 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 financed from commercial banks and not by government funding. 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. The value of these deposits is not affected by the Crown's credit rating.

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.

Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June 2008
$m
30 June 2007
$m
Finance Lease Liabilities  
By source  
5 7 Core Crown 6 8
39 43 Crown entities 43 44
914 1,202 State-owned Enterprises 906 902
(1) Inter-segment eliminations
958 1,251 Total finance lease liabilities 955 954
Minimum Lease Payments  
No later than one year 133 151
Later than one year and not later than five years 473 456
Later than five years 710 769
Total minimum lease payments 1,316 1,376
Present Value of Minimum Lease Payments  
No later than one year 67 88
Later than one year and not later than five years 289 258
Later than five years 569 600
Total present value of minimum lease payments 925 946
Future finance charges 391 430

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.

Note 23: Borrowings (continued) Other Borrowings
Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June 2008
$m
30 June 2007
$m
9,049 9,641 Other borrowings measured at amortised cost 10,737 7,920
7,658 5,951 Other borrowings measured at fair value 4,654 6,151
16,707 15,592 Total other borrowings 15,391 14,071

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 $10,933 million (2007: $8,142 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, $3,393 million (2007: $4,486 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 $11,998 million (2007: $9,585 million) comprise non-sovereign-issued debt of Crown entities and State-owned enterprises. The following table identifies the difference between the carrying amount and amount payable at maturity as well as the extent that fair value movements have resulted from changes in credit risk of the issuing entity. The carrying value can differ to the amount actually payable on maturity where the effect of discounting cash flows is material.

Actual
30 June 2008
$m
30 June 2007
$m
Other borrowings measured at fair value  
Carrying value 4,654 6,151
Amount payable on maturity 4,809 6,220
Fair value impact from changes in credit risk for the year (158) 122
Cumulative fair value impact from changes in credit risk (79) 130

Notes to the Financial Statements (continued)

Note 24:  Insurance Liabilities
Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June 2008
$m
30 June 2007
$m
By entity  
18,949 20,663 ACC liability 20,374 17,328
42 79 EQC - property damage claims 97 68
20 10 Other insurance liabilities 13 22
19,011 20,752 Total insurance liabilities 20,484 17,418
By type  
Outstanding claims liability 18,039 15,438
Unearned premium liability 1,828 1,661
Unearned premium liability deficiency 617 319
Other
Total insurance liabilities 20,484 17,418
By maturity  
3,899 4,757 Expected to be settled within one year 4,615 3,804
15,112 15,995 Expected to be outstanding for more than one year 15,869 13,614
19,011 20,752 Total insurance liabilities 20,484 17,418
Assets arising from insurance obligations are:  
Receivables for premiums 2,822 2,352

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 and the earthquake commission provision of natural disaster insurance to residential property owners.

The objectives, policies and procedures for managing these risks are set out in the governing statutes and policy documents of the Accident Compensation Corporation (ACC) and the Earthquake Commission (EQC).

At balance date, 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 premium is applied to a central estimate to increase to 75% the likelihood that claims will be settled within this amount. No discount factor or inflation factor is applied to the claims liability as claims are generally settled within one year.

All assets held by ACC and EQC are considered available to back present and future claims obligations. ACC and EQC have not deferred any acquisition costs in respect of insurance obligations at the reporting date.

Analysis of ACC insurance liability

The material insurance obligations of the Crown at balance date are managed by ACC. The accounting for these claims is made complex by the existence of a long "tail" to these claims. The rest of this note therefore focuses on these claims. PricewaterhouseCoopers Actuarial Pty Limited have prepared the independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2008. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

Notes to the Financial Statements (continued)

Note 24:  Insurance Liabilities (continued)
Actual
30 June 2008
$m
30 June 2007
$m
Analysis of Outstanding ACC Claims Liability  
Undiscounted outstanding claims liability 47,461 38,702
Discounted adjustment (31,463) (24,967)
Risk margin 2,008 1,657
Total outstanding ACC claims liability 18,006 15,392
Expected future claims payments - central estimate 15,059 12,831
Claims handling expenses 939 904
Risk margin 2,008 1,657
Total outstanding ACC claims liability 18,006 15,392

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

Actual
30 June 2008
$m
30 June 2007
$m
Movement in Outstanding ACC Claims Liability  
Opening balance 15,392 14,114
Claims incurred for the year 2,881 2,768
Claims paid out in the year (3,023) (2,692)
Discount rate unwind 953 770
Experience adjustments (actuarial gains and losses):  
- actual and assumed claim experience 1,021 1,583
- change in discount rate 126 (1,311)
- change in inflation rate 492 159
- change in other economic assumptions 70 50
Other movements 94 (49)
Closing outstanding ACC claims liability 18,006 15,392
Movement in ACC Unearned Premium Liability  
Opening balance 1,617 1,443
Deferral of premiums on current year contracts 1,783 1,617
Earning of premiums previously deferred (1,617) (1,443)
Other
Closing ACC unearned premium liability 1,783 1,617

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

Actual
30 June 2008
$m
30 June 2007
$m
Analysis of ACC Unexpired Risk Liability  
Unearned premium liability 1,783 1,617
Adjusted for unearned premium relating to residual claims (472) (382)
Adjusted ACC unearned premium liability 1,311 1,235
Central estimate of discounted cash flows for future claims 1,630 1,338
Central estimate of discounted future reinsurance recoveries
Risk margin 266 216
Present value of expected cash flows for future accident claims 1,896 1,554
Total ACC unexpired risk liability 585 319

The unexpired risk liability is the extent that the unearned premium liability is insufficient to cover expected future claims (i.e. payments for future accidents within the period covered by the premiums received). Unearned premiums relating to residual claims are excluded from this calculation as they relate to accidents that occurred prior to 1999.

Actual
30 June 2008
$m
30 June 2007
$m
ACC Claims Development  
Current year net ACC claims incurred  
Gross claims incurred and related expenses - undiscounted 5,804 4,433
Reinsurance and other recoveries - undiscounted
Net claims incurred - undiscounted 5,804 4,433
Discount and discount movement  
- gross claims incurred 2,923 2,126
- reinsurance and other recoveries
Net discount movement 2,923 2,126
Total current year net claims incurred 2,881 2,307
Previous years' net ACC claims incurred  
Gross claims incurred and related expenses - undiscounted 6,763 7,423
Reinsurance and other recoveries - undiscounted
Net claims incurred - undiscounted 6,763 7,423
Discount and discount movement  
- gross claims incurred 4,522 6,221
- reinsurance and other recoveries
Net discount movement 4,522 6,221
Total previous years' net claims incurred 2,241 1,202
Net ACC insurance claims incurred 5,122 3,509

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 periods. This reassessment results from new information on these claims and changes in assumptions.

Note 24:  Insurance Liabilities (continued)

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

(i) Risk-free discount rates

A risk-free discount rate based on a "U.S. Treasury Arbitrage" yield curve in New Zealand dollars that relate as closely as possible to the nature, structure and term of the future obligations is used. This yield curve is based on U.S. Treasury bonds and forward currency agreements adjusted for risk and market premiums.

(ii) Risk premium

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 risk premium ensures that the liability provided for will be sufficient at a set probability of possible outcomes (probability of adequacy), and is therefore based on the determination of that probability.

(iii) Inflation and indexation

ACC claims and costs are subject to inflation. Some costs are assumed to increase higher than the general rate of inflation due to factors such as medical treatment becoming available.

(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 over the past three years. Given the variety of influences affecting the tail of claims, the range of voluntary discontinuance rates is extremely diverse.

(v) Claims expected to be settled within one year

The best estimate of claims expected to be settled within one year is the amount of the claim. No discounting, risk premiums or indexation has been applied to these claims.

(vi) Liability adequacy test

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

Actual
30 June 2008
%
30 June 2007
%
Summary of assumptions  
Average weighted term to settle claims 11 years 10 years
  1 month   8 months
Risk margin 12.5% 12.1%
Probability of adequacy of liability 75.0% 75.0%
Risk margin for liability adequacy test 16.3% 16.1%
Probability of adequacy of liability to cover unearned premiums 75.0% 75.0%
For following year  
Risk-free discount rate 6.63% 6.61%
Inflation rates:  
    Weekly compensation 4.1% 3.8%
    Impairment benefits 3.1% 2.9%
    Rehabilitation and other benefits 3.3% 3.0%
    Medical costs 3.3% 3.0%
Beyond next year  
Risk-free discount rate 6.63% 6.61%
Inflation rates:  
    Weekly compensation 3.7% 3.4%
    Impairment benefits 2.7% 2.3%
    Rehabilitation and other benefits 2.9% 2.6%
    Medical costs 2.9% 2.6%

Sensitivity Analysis

If the assumptions described above were to change, this would impact the measurement of insurance liabilities as per the table below:

Change Impact on liability
Actual
  30 June 2008
$m
30 June 2007
$m
Sensitivity of assumptions  
Risk-free discount rate +1% 1,683 1,394
-1% (2,095) (1,725)
Inflation rate +1% (2,229) (1,733)
-1% 1,813 1,557
Superimposed inflation rate excluding +1% (432) (824)
  social rehabilitation for serious injury claims -1% 325 936
Superimposed inflation rate for +1% (750) (543)
  social rehabilitation for serious injury claims
  after four years
-1% 591 499
Discounted mean term +1% 620 582
-1% (643) (582)

Note 25:  Retirement Plan Liabilities

Note 25: Retirement Plan Liabilities
Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June 2008
$m
30 June 2007
$m
8,402 8,141 Government Superannuation Fund (GSF) 8,257 7,160
12 5 Other funds 1
8,414 8,146 Total retirement plan liabilities 8,257 7,161

The Government operates a defined benefit superannuation plan for qualifying employees who are members of the Government Superannuation Fund scheme (GSF). The members' entitlements are defined in the Government Superannuation Fund Act 1956. 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 2008. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from the GSF in respect of past service to be estimated and then discounted back to the valuation date.

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

Actual
30 June 2008
$m
30 June 2007
$m
Net GSF Obligation  
Present value of defined benefit obligation 11,831 11,167
Fair value of plan assets (3,574) (4,007)
Present value of unfunded defined benefit obligation 8,257 7,160
Present value of defined benefit obligation  
Opening defined benefit obligation 11,167 12,098
Expected current service cost 141 163
Expected unwind of discount rate 833 789
Actuarial losses/(gains) 617 (997)
Benefits paid (947) (886)
Past service cost 20
Closing defined benefit obligation 11,831 11,167
Fair value of plan assets  
Opening fair value of plan assets 4,007 3,793
Expected return on plan assets 220 218
Actuarial gains/(losses) (481) 136
Funding of benefits paid by Government 691 653
Contributions from other entities 15 15
Contributions from members 68 73
Benefits paid (947) (886)
Other 1 5
Closing fair value of plan assets 3,574 4,007

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

Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June 2008
$m
30 June 2007
$m
Personnel Expenses  
Expected current service cost 141 163
Expected unwind of discount rate on GSF obligation 833 789
Expected return on plan assets (220) (218)
Contribution from funding employers (84) (89)
    Past service cost 20
629 714 Total included in personnel expenses 690 645
Net (Gains)/Losses on Non-Financial Instruments  
906 Actuarial (gains)/losses recognised in the year 1,098 (1,133)
629 1,620 Total GSF expense 1,788 (488)

The Government expects to make a contribution of $660 million to GSF in the year ended 30 June 2009.

In addition to its obligations to past and present employees, because GSF is liable to income tax under section HJ 1 of the Income Tax Act 2004, the Crown will be required to make additional contributions equivalent to the tax on future investment income.

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

Actual
30 June 2008
%
30 June 2007
%
Summary of assumptions  
For following year  
Discount rate 6.95% 7.46%
Expected return on plan assets 5.50% 5.75%
Expected rate of salary increases 3.00% 3.00%
Expected rate of inflation 2.25% 2.25%
Beyond next year  
Discount rate 6.06% to 6.95% 6.34% to 7.20%
Expected return on plan assets 5.50% 5.75%
Expected rate of salary increases 3.00% 3.00%
Expected rate of inflation 2.25% 2.25%

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

Actual
30 June 2008
$m
30 June 2007
$m
Equity instruments 1,838 2,143
Debt instruments of the Government 34 95
Other debt instruments 830 1,019
Property 229 291
Other 643 459
Fair value of plan assets 3,574 4,007

The expected rate of return on the plan assets of 5.50% (2007: 5.75%) 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 main asset classes are equities and debt instruments.

The actual return on plan assets was -6.66%, or -$261 million (2007: 9.50% or $354 million).

Sensitivity Analysis

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

Change Impact on obligation
Actual
30 June 2008
$m
30 June 2007
$m
Sensitivity of assumptions    
Discount rate + 1% (1,139) (1,069)
- 1% 1,371 1,360

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 two year history of the present value of the unfunded defined benefit obligation and experience adjustments is as follows:

Actual
30 June 2008
$m
30 June 2007
$m
Present value of defined benefit obligation 11,831 11,167
Fair value of plan assets (3,574) (4,007)
Present value of unfunded defined benefit obligation 8,257 7,160
Experience adjustment - increase/(decrease) in plan liabilities 164 129
Experience adjustment - increase/(decrease) in plan assets (479) 136

Note 26:  Provisions

Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
By type  
1,621 1,738 Provision for employee entitlements 2,220 1,828
557 482 Provision for Kyoto 562 704
805 780 Provision for National Provident Fund guarantee 907 771
867 1,045 Other provisions 1,064 1,253
3,850 4,045 Total provisions 4,753 4,556
By source  
2,267 2,353 Core Crown 2,763 2,537
1,042 1,214 Crown entities 1,500 1,195
757 610 State-owned Enterprises 684 852
(216) (132) Inter-segment eliminations (194) (28)
3,850 4,045 Total provisions 4,753 4,556
By maturity  
1,849 1,536 Expected to be settled within one year 2,281 2,171
2,001 2,509 Expected to be outstanding for more than one year 2,472 2,385
3,850 4,045 Total provisions 4,753 4,556
Provision for employee entitlements  
Opening provision 1,828 1,636
Additional provisions recognised 1,467 1,134
Provision used during the period (976) (803)
Reversal of previous provision (99) (137)
Unwind of discount rate (2)
Closing provision 2,220 1,828

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 a discount rate of 5.5% has been used.

Actual
30 June 2008
$m
30 June 2007
$m
Provision for Kyoto  
Opening provision 704 656
Change in the price of carbon and foreign exchange rate 226 (20)
Change in net projected emission units (368) 68
Closing provision 562 704

30 June 2008
Emission Units

million tonnes (Mt)

30 June 2007
Emission Units

million tonnes (Mt)

Provision for Kyoto
Kyoto target (assigned amount units) 309.6 309.5
Less AAUs allocated to emission reducing projects 7.0 7.5
Total commitment target 302.6 302.0
Projected emission units
Agriculture 198.5 203.1
Energy (incl. transport) and industrial processes 185.6 195.1
Waste 7.2 7.0
Solvent and other product use 0.2 0.3
Total projected emission units 391.5 405.5
Removals via forest 84.1 79.0
Deforestation emissions (16.9) (21.0)
Less net removals via forests 67.2 58.0
Net projected emission units 324.3 347.5
Deficit in units 21.7 45.5

New Zealand has committed under the Kyoto Protocol to reducing its average net emissions of greenhouse gases over 2008-2012 (the first commitment period of the Kyoto Protocol or CP1) 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 against carbon removed by forests. This obligation will crystallise when the first Kyoto commitment period is settled up post-2012.

New Zealand's net obligation as at 30 June 2008 of $NZ562 million (2007: $NZ704 million) is based on a deficit of 21.7 million Kyoto Protocol emission units and a carbon price of €12.50 per unit. The carbon price in New Zealand dollars equates to $NZ25.89, using the 30 June 2008 exchange rate of €0.48285 = $NZ1 (30 June 2007: €0.5726 = $NZ1, and a carbon price of €8.86 per unit).

The quantum of the deficit has been compiled from agricultural, forest sink and deforestation projections provided by the Ministry of Agriculture and Forestry, energy (including transport) and industrial processes projections from the Ministry of Economic Development and waste projections from the Ministry for the Environment. 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 14 April 2008.

AEA Technology, an independent UK based firm, has assessed the robustness of the assumptions and methodologies underpinning the projections and found them to be sound and reasonable.

The movement in the projected balance of Kyoto Protocol units is set out in the Net Position Report 2008. Projected balance of Kyoto Protocol units during the first commitment period which is published by the Ministryfor the Environment. The movement in the projected emission units deficit is primarily related to the following key factors: transport sector emissions are projected to be lower than in 2007 due to actual fuel use data in 2007 being lower than projected and fuel prices being higher; agriculture emissions are projected to be lower due to the effects of drought early in 2008 and a continuing decline in sheep numbers; based on an intentions survey, emissions from deforestation are projected to be lower than in 2007 mainly due to the implementation of an Emissions Trading Scheme; and there is an increase in the estimate of removals due to the implementation of recommendations made by AEA Technology. A full copy of this report can be found on the Ministry's website: www.mfe.govt.nz .

The carbon price has been determined by the Treasury. The Allen Consulting Group have reviewed this work and are satisfied that the methodology (and data sources) applied is a robust high level approach, and that €12.50 is a reasonable carbon price estimate at this time for valuing the New Zealand Government's possible future liabilities under the Kyoto Protocol.

Provisions by their nature are more uncertain than most 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 and the exchange rate with the European currency unit, and government policy changes.

The Climate Change (Emissions Trading and Renewable Preference) Bill had its third and final reading on 10 September 2008. This Bill establishes an Emissions Trading Scheme (ETS) in New Zealand. The Net PositionReport 2008 has been prepared on the basis of the government decision to introduce an ETS in New Zealand.

No liability or contingent liability for periods beyond 2012 has been recognised, as New Zealand currently has no specific obligations beyond the First Commitment Period. The architecture of any obligations in future periods has yet to be negotiated.

Actual
30 June 2008
$m
30 June 2007
$m
Provision for National Provident Fund guarantee  
Opening provision 771 803
Additional provisions recognised 46
Reversal of previous provision (18)
Unwind of discount rate and effect of changes in discount rate 90 (14)
Closing provision 907 771

The Government has guaranteed superannuation schemes managed by the National Provident Fund (NPF) (refer to note 31 Contingent Liabilities and Contingent Assets for details of the guarantee). As at 30 June 2008 the NPF's DBP Annuitants' scheme was in a net deficit position of $907 million (2007:$771 million), represented by a gross estimated pension obligation of $1,020 million (2007: $994 million) with net investment assets valued at $ 113 million (2007: $223 million). No additional provision was required in the year for other pension schemes managed by NPF under the Government's guarantee .

Actual
30 June 2008
$m
30 June 2007
$m
Other provisions  
Opening provision 1,253 1,038
Additional provisions recognised 309 495
Provision used during the period (479) (264)
Reversal of previous provision (22) (78)
Unwind of discount rate and effect of changes in discount rate 3 62
Closing provision 1,064 1,253

Note 27: Net Worth Attributable to the Crown

Forecast   Actual
Original
Budget
$m
Estimated
Actuals
$m
  30 June 2008
$m
30 June 2007
$m
48,239 46,767 Taxpayer funds 46,700 44,222
47,402 52,498 Property, plant and equipment revaluation reserve 58,566 52,442
13 29 Investment revaluation reserve 34 23
97 (175) Cash flow hedge reserve (151) (122)
17 (32) Foreign currency translation reserve (17) (34)
95,768 99,087 Total net worth attributable to the Crown 105,132 96,531
Taxpayer Funds  
42,219 44,222 Opening taxpayers funds 44,222 36,214
6,431 2,559 Operating balance excluding minority interest 2,384 8,022
(470) (1) Other movements 4 13
59 (13) Transfers from/(to) property, plant and equipment revaluation reserve 90 (27)
48,239 46,767 Closing taxpayers funds 46,700 44,222
Property, Plant and Equipment Revaluation Reserve  
47,459 52,442 Opening revaluation reserve 52,442 47,153
2 43 Net Revaluations 6,214 5,262
(59) 13 Transfers from/(to) taxpayer funds (90) 27
47,402 52,498 Closing revaluation reserve 58,566 52,442

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

Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Investment Revaluation Reserve  
13 23 Opening investment revaluation reserve 23 13
6 Increase arising on revaluation of available-for-sale financial assets 14 10
Cumulative (gain)/loss transferred to the statement of financial 
performance on sale of available-for-sale financial assets
(3)
13 29 Closing investment revaluation reserve 34 23

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

Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Cash Flow Hedge Reserve  
62 (122) Opening cash flow hedge reserve (122) 281
(39) (2) Transfer into reserve 9 (331)
74 (15) Transfer to the statement of financial performance 22 (59)
(36) Transfer to initial carrying value of hedged item (60) (13)
97 (175) Closing cash flow hedge reserve (151) (122)

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.

Forecast Actual
Original
Budget
$m
Estimated
Actuals
$m
30 June 2008
$m
30 June 2007
$m
Foreign currency translation reserve  
17 (34) Opening foreign currency translation reserve (34) 31
2 Arising from translation of foreign operations 17 (65)
17 (32) Closing foreign currency translation reserve (17) (34)

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, and 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: Capital Objectives and Fiscal Policy

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

  • reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year
  • once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues
  • achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future
  • managing prudently the fiscal risks facing the Government, and
  • pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.

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

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 Reports published with the Government's budget.

Long-term fiscal objectives
Long-term fiscal objectives To achieve the objectives, the Government's high-level focus is on:

Operating balance

Operating surpluses on average over the economic cycle sufficient to meet the requirements for contributions to the NZS Fund and ensure consistency with the debt objective.

  • Operating surpluses during the build-up phase of the NZS Fund. The Government's focus is on maintaining the OBEGAL excluding NZS Fund revenue at a level sufficient, on average, to meet the requirements for contributions to the NZS Fund.
  • The Government's focus in meeting this objective is on core Crown revenues and expenses, maintaining tax-to-GDP and core Crown expenses-to-GDP around current levels.
  • As set out in the Government's revenue strategy, tax policy decisions will be consistent with the overall fiscal strategy including the Government's long-term revenue objective.
  • SOEs and Crown entities contributing to surpluses, consistent with their legislation and Government policy.

Revenue

Ensure sufficient revenue to meet the operating balance objective.

Expenses

Ensure expenses are consistent with the operating balance objective.

Debt

Manage total debt at prudent levels. Gross sovereign-issued debt broadly stable at around 20% of GDP over the next 10 years.

  • Gross sovereign-issued debt-to-GDP will be broadly stable over the period ahead of the major demographic changes associated with population ageing.
  • The Government is effectively targeting a level of gross sovereign-issued debt excluding the increase in debt on the Reserve Bank balance sheet as a result of the change in the liquidity management regime.
  • SOEs will have debt structures that reflect best commercial practice. Changes in the level of debt will reflect specific circumstances.

Net worth

Increase net worth consistent with the operating balance objective.

  • The NZS Fund will continue to accumulate assets through its retained earnings and Crown contributions.
  • Consistent with the net worth objective, there will also be a focus on quality investment.
Short Term Fiscal Intentions
Fiscal Strategy Report 2007 Fiscal Strategy Report 2008 Fiscal Position 2008

Operating balance

Based on operating amounts for the 2007 Budget, and indicative amounts for the 2008 and 2009 Budgets, the OBEGAL excluding NZS Fund revenue is forecast to be 3.4% of GDP in 2007/08, decreasing to 1.7% of GDP by 2010/11. This remains consistent with the long-term objective for the operating balance.

Operating balance

Based on operating amounts for the 2008 Budget, and indicative amounts for the 2009 and 2010 Budgets, the OBEGAL excluding NZS Fund retained revenue is forecast to be 0.7% of GDP in 2008/09, decreasing to 0.1% of GDP by 2011/12.  This remains consistent with the long-term objective for the operating balance.

Operating balance

For the year ended 30 June 2008  the OBEGAL excluding NZS Fund retained revenue was 3.1% of GDP  (30 June 2007: 3.7%).

Debt

Total debt (including Reserve Bank settlement cash) is forecast to be 25.3% of GDP in 2010/11.Gross sovereign-issued debt including net settlement cash is forecast to be 21.8% of GDP in 2010/11. Excluding net settlement cash, gross sovereign-issued debt is forecast to be 18.8% of GDP in 2010/11.The Government will set forecast new operating and capital spending amounts over the next three years that are consistent with the long-term objective for debt.

Debt

Total debt (including Reserve Bank Settlement Cash) is forecast to be 25.9% of GDP in 2011/12. Gross sovereign-issued debt including Settlement Cash is forecast to be 19.6% of GDP in 2011/12.  Excluding Settlement Cash, gross sovereign-issued debt is forecast to be 16.8% of GDP in 2011/12.  The Government will set forecast new operating and capital spending amounts over the next three years that are consistent with the long-term objective for debt.

Debt

Total debt (including Reserve Bank Settlement Cash) was 25.6% of GDP as at 30 June 2008 (30 June 2007:  24.8%).  Gross sovereign-issued debt including Settlement was 21.0% of GDP as at 30 June 2008 (30 June 2007: 21.8%).  Excluding Settlement Cash, gross sovereign-issued debt was 17.4% of GDP as at 30 June 2008 (30 June 2007: 18.2%).

Expenses

Total Crown expenses are forecast to be 42.5% of GDP in 2010/11. Core Crown expenses are forecast to average 32.7% over the forecast period and be 33.1% of GDP in 2010/11. This assumes new operating expense amounts of $1.97 billion for the 2007 Budget, $2.0 billion for the 2008 Budget and $2.0 billion for the 2009 Budget (GST exclusive).

Expenses

Total Crown expenses are forecast to be 42.4% of GDP in 2011/12.  Core Crown expenses are forecast to average 32.9% over the forecast period and be 33.0% of GDP in 2011/12.  This assumes new operating expense amounts of $1.75 billion per annum for the 2009 Budget, $1.79 billion per annum for the 2010 Budget and $1.82 billion per annum for the 2011 Budget (GST exclusive).

Expenses

Total Crown expenses are 42.1% of GDP for the year ended 30 June 2008 (30 June 2007:  40.8%).  Core Crown expenses were 31.7% GDP for the year ended 30 June 2008 (30 June 2007:  32.0%).

Revenues

Total Crown revenues are forecast to be 44.3% of GDP in 2010/11. Within this, core Crown revenues are forecast to be 34.1% of GDP in 2010/11.This assumes new revenue initiatives in the 2008 Budget resulting in a $1.13 billion reduction in revenue from 2008/09.The Government will set revenue plans over the next three years that ensure progress is made towards the long-term revenue objective.

Revenues

Total Crown revenues are forecast to be 42.5% of GDP in 2011/12. Within this, core Crown revenues are forecast to be 32.7% of GDP in 2011/12.  Budget 2008 introduces personal tax reductions. As a result, core Crown tax-to-GDP is forecast to decline from 31.5% in 2007/08 to 29.6% in 2011/12.

Revenues

Total Crown revenues were 45.3% of GDP for the year ended 30 June 2008 (30 June 2007:  44.2%). Within this, core Crown revenues were 34.3 % of GDP for the year ended 30 June 2008 (30 June 2007:  34.5%).

Net worth

Total Crown net worth is forecast to be 54.4% of GDP in 2006/07, rising to 57.3% of GDP in 2010/11. Excluding NZS Fund assets total Crown net worth is forecast to be 43.5% of GDP in 2010/11. Core Crown net worth is forecast to be 33% of GDP in 2010/11.

Net worth

Total Crown net worth is forecast to be 52.5% of GDP in 2011/12. Core Crown net worth is forecast to be 28.4% of GDP in 2011/12.

Net worth

Total Crown net worth, defined as the residual between assets and liabilities, was 58.6% of GDP as at 30 June 2008 (30 June 2007: 57.4%). Core Crown net worth, ie, the net of assets and liabilities of the Crown, departments, Offices of Parliament, the Reserve Bank and the New Zealand Superannuation Fund, was 31.6% of GDP as at 30 June 2008 (30 June 2007: 30.1%).

 

Note 29:  Segment Analysis

Note 29:  Segment Analysis
Current Year Actual vs Estimated Actual
Core Crown Crown Entities State-owned Enterprises Inter-segment eliminations Total Crown
Actual
2008
$m
Estimated
Actual
2008
$m
Actual
2008
$m
Estimated
Actual
2008
$m
Actual
2008
$m
Estimated
Actual
2008
$m
Actual
2008
$m
Estimated
Actual
2008
$m
Actual
2008
$m
Estimated
Actual
2008
$m
Revenue          
Taxation revenue 56,747 56,673 (375) (487) 56,372 56,186
Other sovereign revenue 733 673 4,039 4,061 (893) (883) 3,879 3,851
Revenue from core Crown funding 20,259 19,583 (20,259) (19,583)
Sales of goods and services 1,097 1,161 1,797 1,619 13,201 11,711 (696) (809) 15,399 13,682
Interest revenue and dividends 2,344 2,562 1,233 1,085 704 509 (1,067) (953) 3,214 3,203
Other revenue 898 867 1,685 1,789 692 874 (660) (639) 2,615 2,891
Total Revenue (excluding gains) 61,819 61,936 29,013 28,137 14,597 13,094 (23,950) (23,354) 81,479 79,813
Expenses          
Transfer payments and subsidies 18,519 18,666 (145) (146) 18,374 18,520
Personnel expenses 5,584 5,621 8,741 8,624 2,164 2,186 (11) (9) 16,478 16,422
Other operating expenses 30,434 30,790 19,307 18,874 10,955 9,443 (22,807) (22,177) 37,889 36,930
Interest expenses 2,460 2,527 248 275 870 734 (477) (582) 3,101 2,954
Operating and finance expenses 38,478 38,938 28,296 27,773 13,989 12,363 (23,295) (22,768) 57,468 56,306
Forecast new operating spending and top down adjustment (240) (240)
Total Expenses (excluding losses) 56,997 57,364 28,296 27,773 13,989 12,363 (23,440) (22,914) 75,842 74,586
Operating Balance before gains/(losses) 4,822 4,572 717 364 608 731 (510) (440) 5,637 5,227
Total Gains/(losses) (931) (843) (2,243) (1,649) 115 16 (194) (192) (3,253) (2,668)
Operating Balance 3,891 3,729 (1,526) (1,285) 723 747 (704) (632) 2,384 2,559
Assets          
Financial assets 59,629 56,036 23,891 23,479 11,727 10,402 (10,184) (9,566) 85,063 80,351
Property, plant and equipment 28,637 26,458 43,659 42,683 31,033 29,214 103,329 98,355
Investments in associates, CEs and SOEs 25,696 25,709 7,073 6,606 224 193 (24,928) (24,989) 8,065 7,519
Other assets 2,220 2,209 715 565 1,458 1,405 (15) (49) 4,378 4,130
Forecast for new capital spending 690 -   690
Total Assets 116,182 111,102 75,338 73,333 44,442 41,214 (35,127) (34,604) 200,835 191,045
Liabilities          
Borrowings 37,167 37,034 4,705 4,650 12,817 12,608 (8,579) (8,746) 46,110 45,546
Other liabilities 22,032 19,513 26,256 26,130 6,648 5,626 (5,725) (5,153) 49,211 46,116
Total Liabilities 59,199 56,547 30,961 30,780 19,465 18,234 (14,304) (13,899) 95,321 91,662
Net Worth 56,983 54,555 44,377 42,553 24,977 22,980 (20,823) (20,705) 105,514 99,383

Note 29:  Segment Analysis (continued)

Current Year Actual vs Estimated Actual
Core Crown Crown Entities State-owned Enterprises Inter-segment eliminations Total Crown
Actual
2008
$m
Estimated
Actual
2008
$m
Actual
2008
$m
Estimated
Actual
2008
$m
Actual
2008
$m
Estimated
Actual
2008
$m
Actual
2008
$m
Estimated
Actual
2008
$m
Actual
2008
$m
Estimated
Actual
2008
$m
Revenue          
Taxation revenue 56,747 53,477 (375) (413) 56,372 53,064
Other sovereign revenue 733 636 4,039 3,640 (893) (780) 3,879 3,496
Revenue from core Crown funding 20,259 18,751 (20,259) (18,751)
Sales of goods and services 1,097 1,095 1,797 1,389 13,201 10,701 (696) (572) 15,399 12,613
Interest revenue and dividends 2,344 2,580 1,233 756 704 484 (1,067) (825) 3,214 2,995
Other revenue 898 423 1,685 1,664 692 703 (660) (369) 2,615 2,421
Total Revenue (excluding gains) 61,819 58,211 29,013 26,200 14,597 11,888 (23,950) (21,710) 81,479 74,589
Expenses          
Transfer payments and subsidies 18,519 16,453 (145) (107) 18,374 16,346
Personnel expenses 5,584 5,092 8,741 8,183 2,164 2,018 (11) (9) 16,478 15,284
Other operating expenses 30,434 30,129 19,307 16,709 10,955 8,301 (22,807) (20,925) 37,889 34,214
Interest expenses 2,460 2,330 248 265 870 685 (477) (395) 3,101 2,885
Operating and finance expenses 38,478 37,551 28,296 25,157 13,989 11,004 (23,295) (21,329) 57,468 52,383
Total Expenses (excluding losses) 56,997 54,004 28,296 25,157 13,989 11,004 (23,440) (21,436) 75,842 68,729
Operating Balance before gains/(losses) 4,822 4,207 717 1,043 608 884 (510) (274) 5,637 5,860
Total Gains/(losses) (931) 2,303 (2,243) (20) 115 (77) (194) (44) (3,253) 2,162
Operating Balance 3,891 6,510 (1,526) 1,023 723 807 (704) (318) 2,384 8,022
Assets          
Financial assets 59,629 51,841 23,891 22,540 11,727 8,942 (10,184) (9,605) 85,063 73,718
Property, plant and equipment 28,637 26,215 43,659 41,296 31,033 28,087 103,329 95,598
Investments in associates, CEs and SOEs 25,696 25,049 7,073 6,331 224 88 (24,928) (24,467) 8,065 7,001
Other assets 2,220 2,111 715 621 1,458 1,324 (15) (26) 4,378 4,030
Total Assets 116,182 105,216 75,338 70,788 44,442 38,441 (35,127) (34,098) 200,835 180,347
Liabilities          
Borrowings 37,167 35,885 4,705 4,430 12,817 10,293 (8,579) (8,710) 46,110 41,898
Other liabilities 22,032 18,538 26,256 23,032 6,648 5,348 (5,725) (5,296) 49,211 41,622
Total Liabilities 59,199 54,423 30,961 27,462 19,465 15,641 (14,304) (14,006) 95,321 83,520
Net Worth 56,983 50,793 44,377 43,326 24,977 22,800 (20,823) (20,092) 105,514 96,827
Cost of Acquisition of Physical Assets 1,387 1,547 2,002 1,800 1,895 1,920 (1) 5,284 5,266

 

Note 30:  Commitments

Actual
30 June 2008
$m
30 June 2007
$m
Capital Commitments  
Specialist military equipment 873 823
Land and buildings 1,121 605
Other property, plant and equipment 4,303 2,617
Other capital commitments 304 184
Tertiary Education Institutions 209 90
Total capital commitments 6,810 4,319
Operating Commitments  
Non-cancellable accommodation leases 2,460 2,296
Other non-cancellable leases 2,390 2,355
Non-cancellable contracts for the supply of goods and services 2,157 1,626
Other operating commitments 7,995 7,278
Tertiary Education Institutions 315 303
Total operating commitments 15,317 13,858
Total commitments 22,127 18,177
Total Commitments by Segment  
Core Crown 19,627 19,944
Crown entities 15,830 9,835
State-owned Enterprises 4,724 3,508
Inter-segment eliminations (18,054) (15,110)
Total commitments  22,127 18,177
By Term  
Capital Commitments  
One year or less 3,013 1,821
From one year to two years 1,131 609
From two to five years 2,376 1,352
Over five years 290 537
Capital Commitments  6,810 4,319
Operating Commitments  
One year or less 7,128 5,993
From one year to two years 2,783 2,709
From two to five years 3,208 2,908
Over five years 2,198 2,248
Operating Commitments  15,317 13,858
Total Commitments 22,127 18,177

Note 31:  Contingent Liabilities and Contingent Assets

Actual
30 June 2008
$m
30 June 2007
$m
Quantifiable Contingent Liabilities  
Guarantees and indemnities  
Cook Islands - Asian Development Bank loans 14 13
Terralink Limited - indemnification of receivers and managers 10 10
Ministry of Justice - Treaty settlements, tax liabilities 200 105
Ministry of Transport - funding guarantee 10 10
Guarantees and indemnities of Crown entities and State-owned Enterprises 40 18
Other guarantees and indemnities 12 15
Total guarantees and indemnities 286 171
Uncalled capital  
Asian Development Bank 1,081 996
European Bank for Reconstruction and Development 14 12
International Bank for Reconstruction and Development 1,077 1,068
Other 33
Total uncalled capital 2,205 2,076
Legal proceedings and disputes  
Health - legal claims 39 70
Tax disputes 249 941
Other legal claims against Crown entities and State-owned Enterprises 33
Other legal proceedings and disputes 95 126
Total legal proceedings and disputes 383 1,170
Other contingent liabilities  
International finance organisations 1,727 1,431
New Zealand Export Credit Office 37 8
Ministry of Economic Development 146
Reserve Bank - demonetised currency 23 23
Social Development - claim for judicial review 79
Transpower New Zealand Limited 98
Other contingent liabilities of Crown entities and State-owned Enterprises 142 26
Other contingent liabilities 66 18
Total other contingent liabilities 1,995 1,829
Total quantifiable contingent liabilities 4,869 5,246
Total Quantifiable Contingent Liabilities by Segment  
Core Crown 4,685 5,071
Crown entities 86 45
State-owned Enterprises 98 150
Inter-segment eliminations (20)
Total quantifiable contingent liabilities 4,869 5,246
Quantifiable Contingent Assets  
Suspensory loans to integrated schools 77 85
Legal proceedings and disputes 307
Other contingent assets 5 1
Total quantifiable contingent assets 389 86

Contingent liabilities are costs that the Crown will have to face if a particular event occurs. 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 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.

Guarantees and indemnities

Guarantees and indemnities are disclosed in accordance with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

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 Justice - Treaty settlements, tax liabilities

Under Deeds of Settlement completed in the Treaty settlement process the Crown has indemnified the appropriate governance entity against any goods and services tax or income tax liability arising from the payment of tangible redress.

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.

Legal proceedings and disputes

The amounts under quantifiable contingent liabilities for legal proceedings and disputes are shown exclusive of any interest and costs that may be claimed if these cases were decided against the Crown.

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.

Health - legal claims

Claims against the Crown in respect of alleged negligence for failing to screen blood for Hepatitis C when screening had first become available, resulting in people allegedly contracting Hepatitis C through contaminated blood and blood products.

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.

Other quantifiable contingent liabilities

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.

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. The amount of future liabilities arising from these guarantees is expected to be minor.

Reserve Bank - demonetised currency

The Crown has a contingent liability for the face value of the demonetised $1 and $2 notes issued which have yet to be repatriated.

Unquantifiable contingent liabilities

Accounting standard NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that contingent liabilities be disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Disclosure of remote contingent liabilities is only required if knowledge of the transaction or event is necessary to achieve the objectives of general purpose financial reporting. 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

AsureQuality Limited (formerly AgriQuality 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.

Auckland Rail Lease

The Crown has indemnified Toll NZ Limited against any losses arising from breaches of the Sale and Purchase Agreement with the Crown relating to the purchase of the Auckland rail lease and infrastructure assets.

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 dis-established and absorbed into the Department of Building and Housing and, to prevent conflicts of interest, Treasury was given responsibility for managing weathertight claims against the BIA on behalf of the Crown from 1 July 2005.

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. Refer to note 24 for additional information regarding EQC's insurance liability.

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.

Ministry of Fisheries - indemnity provided for delivery of registry services

The Crown has indemnified Commercial Fisheries Services Limited against claims made by third parties arising from Commercial Fisheries Services undertaking registry services under contract to the Chief Executive of the Ministry of Fisheries. This indemnity, provided under the Fisheries Acts 1983 and 1996, expires on 30 September 2009.

Genesis Power Ltd (Genesis Energy)

The Crown has entered into a deed with Genesis Energy to share a specified and limited amount of risk around the sufficiency of Genesis Energy's long term supply of gas to cover the Huntly e3p's (a 385 MW combined cycle gas turbine power station) minimum needs. The agreement sees the Crown compensate Genesis Energy in the event it has less gas than it needs.

Geothermal carbon tax indemnity 

As part of the sale and purchase agreement between the Crown and Mighty River Power (MRP), the Crown has agreed to provide an indemnity for the payment of carbon taxes, should legislation be passed that does not allow for an automatic pass-through of the charges to end-users. The indemnity is time bound and contractually limited in the amount that can be claimed. The indemnity is not limited to MRP and will be available to any subsequent owner of the Crown's Kawerau geothermal assets.

Housing New Zealand Corporation (HNZC) 

HNZC is liable to the owners (ANZ National Bank Limited, Ichthus Limited and Westpac Banking Corporation) 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.

Note 31: Contingent Liabilities and Contingent Assets (continued)

Guarantees and indemnities (continued)

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.

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 deficit in the DBP (Annuitants') Scheme (refer to note 26).

New Zealand Railways Corporation 

The Crown has indemnified the directors of the New Zealand 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 New Zealand Railways Corporation against any liability arising from the transfer of the rail network and associated assets and liabilities to the Corporation on 1 September 2004.

Persons exercising investigating powers 

Section 63 of the Corporations (Investigation and Management) Act 1989 indemnifies the 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.

Ports of Auckland

The Crown has entered into a confidentiality agreement with Ports of Auckland in relation to the purchase of two marinas. The agreement contains an indemnity against any losses arising from a breach of the agreement.

Public Trust

The Crown is liable to meet any deficiency in the Public Trust's Common Fund (section 52 of the Public Trust Act 2001).

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.

Toll NZ Ltd - purchase of rail network assets

The agreement between the Crown and Toll NZ Ltd for the Crown's purchase of the rail network and associated assets on 30 June 2004 contains the following provisions:

  • the Crown has indemnified Toll NZ Ltd against any liability arising from the assigned contracts, leases, etc after their assignment dates
  • the Crown has indemnified Toll NZ Ltd against certain potential claims by employees

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 four 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 allegations made in relation to the air cargo business are also the subject of investigations by regulators in a number of jurisdictions including the United States and the European Union. A formal Statement of Objections has been issued by the European Commission to 25 airlines including Air New Zealand and has been responded to. 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. The fourth class action alleges (in the United States) that Air New Zealand together with 11 other airlines conspired in respect of fares and surcharges on trans-Pacific routes. All class actions are being defended.

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.

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.

The Crown has further agreed to review its level of support to the tournament if the actual tax revenue arising from the tournament exceeds forecasts.

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.

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. The non-quantifiable contingent liability relates to the risk that total settlement redress, including binding recommendations from the Waitangi Tribunal, will trigger these relativity payments.

Other contingencies

Foreshore and seabed

The Foreshore and Seabed Act 2004 (FSA):

  • vests the full legal and beneficial ownership of the public foreshore and seabed in the Crown
  • provides for the recognition and protection of ongoing customary rights with respect to the public foreshore and seabed
  • enables applications to the High Court to investigate if previously held common law rights have been adversely impacted, and if so, providing for those affected either to participate in the administration of a foreshore and seabed reserve or else enter into formal discussions on redress, and
  • provides for general rights of public access and recreation in, on, over, and across the public foreshore and seabed and general rights of navigation within the foreshore and seabed.

The public foreshore and seabed means the marine area that is bounded on the landward side by the line of mean high water spring; and on the seaward side by the outer limits of the territorial sea, but does not include land subject to a specified freehold interest (refer section 5 of the FSA).

The FSA codifies the nature of the Crown's ownership interest in the public foreshore and seabed on behalf of the public of New Zealand. Although full legal and beneficial ownership of the public foreshore and seabed has been vested in the Crown, there are significant limitations to the Crown's rights under the FSA. As well as recognising and protecting customary rights, the FSA significantly restricts the Crown's ability to alienate or dispose of any part of the public foreshore and seabed and significantly restricts the Crown's ability to exclude others from entering or engaging in recreational activities or navigating in, on or within the public foreshore and seabed. Because of the complex nature of the Crown's ownership interest in the public foreshore and seabed and because we are unable to obtain a reliable valuation of the Crown's interest, the public foreshore and seabed has not been recognised as an asset in these financial statements.

Contingent assets

Legal proceedings and disputes

Legal proceedings and disputes are contingent assets in relation to Inland Revenue pending assessments. When a taxpayer disagrees with a proposed adjustment following an audit by the Inland Revenue, the Department issues a Notice of Proposed Adjustment (“NOPA”) which quantifies the proposed adjustment. The taxpayer is entitled to dispute this.

In addition, the Crown is currently in dispute with a number of financial institutions regarding the tax treatment of certain structured finance transactions. However, it was not possible to recognise revenue and a receivable for the transactions because of fundamental uncertainty with the application of tax law to the structured finance transactions, which will be tested in court in due course, and the fact that the likelihood of success of a court case cannot be reliably predicted.

Note 32: Financial Instruments

The Government has devolved responsibility for the financial management of its financial portfolios to its sub-entities such as NZDMO, Reserve Bank, NZ Superannuation 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.

Sub-entities with responsibility for managing significant financial assets or financial liabilities are:

Manager Financial Instrument Portfolio Risk Management
New Zealand Debt Management Office (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 (settlement cash) and circulating currency The overall risk management framework is designed to strongly encourage the sound and prudent management of the banks risk in a way that's consistent with financial market best practice.
Inland Revenue Department Student Loans and tax receivables The department has debt management policies and procedures to ensure debt can be collected in a timely manner in accordance with Government policy.
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
  • careful selection and monitoring of managers to ensure the Guardians have sufficient conviction that each manager will maximise the probability that return expectations will be met
  • to 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 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 in 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 Kiwbank) Financial instruments from its debt portfolio and investment activity.  This includes activities as a financial intermediary and financial market participant (Kiwibank). The Board is responsible for risk management policies and procedures.  This includes appointing a finance risk committee to monitor risk management.
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 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.
New Zealand Customs Service Tax receivables The Service has debt management policies and procedures to ensure debt can be collected in a timely manner in accordance with Government policy.
Ministry of Social Development Benefit receivables and 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.
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 minimise potential adverse impacts on its financial performance.  The Group uses derivative 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 Genesis'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.

The size of these portfolios on an unconsolidated basis (ie, including cross-holdings of government stock and other Crown instruments) are:

  30 June 2008 $m 30 June 2007 $m
  Unconsolidated
financial assets
Unconsolidated
financial liabilities
Unconsolidated
financial assets
Unconsolidated
financial liabilities
NZDMO 16,578 32,952 12,939 32,370
Reserve Bank 18,159 16,160 17,718 16,176
Inland Revenue 14,294 4,575 13,193 3,294
NZ Superannuation Fund 13,791 494 12,576 90
ACC 12,958 720 12,169 570
NZ Post 7,385 7,243 5,119 4,943
Air New Zealand 2,065 1,932 1,749 2,069
EQC 5,615 6 5,484 5
Transpower 283 1,266 762 1,642
Customs 1,570 4 1,335 4
Ministry of Social Development 1,407 368 1,261 311
Mighty River Power 459 1,096 308 729
Meridian Energy 689 1,649 327 960
Genesis Energy 510 1,035 295 682

(a)  Significant accounting policies

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 of the financial statements.

Note 32:  Financial Instruments (continued)

(b) Classes and categories of financial assets

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 as at 30 June 2008 Designation
Sovereign
receivables
$m
Amortised
cost
$m
Available
for sale
$m
Held for
trading
$m
Fair value
through P&L
$m
Total
$m
Cash and cash equivalents 3,804 3,804
Tax receivables (note 14) 7,398 7,398
Levies, fines and penalty receivables (note 14) 3,106 3,106
Social benefit receivables (note 14) 440 440
Trade and other receivables (note 14) 3,214 3,214
Student loans (note 17) 6,741 6,741
Kiwibank mortgages (note 17) 2,427 3,154 5,581
Other advances (note 17) 578 48 626
Long-term deposits (note 15) 2,787 2,787
Share investments (note 16) 76 12,888 12,964
Derivatives in gain (note 15) 1,563 1,563
Marketable securities (note 15) 759 490 35,402 36,651
IMF special drawing rights (note 15) 188 188
Total financial assets by designation 10,944 19,739 835 2,053 51,492 85,063
Financial assets as at 30 June 2007 Designation
Sovereign
receivables
$m
Amortised
cost
$m
Available
for sale
$m
Held for
trading
$m
Fair value
through P&L
$m
Total
$m
Cash and cash equivalents 4,162 4,162
Tax receivables (note 14) 6,369 6,369
Levies, fines and penaltyreceivables (note 14) 2,589 2,589
Social benefit receivables (note 14) 394 394
Trade and other receivables (note 14) 2,703 2 2,705
Student loans (note 17) 6,011 6,011
Kiwibank mortgages (note 17) 885 2,752 3,637
Other advances (note 17) 553 527 1,080
Long-term deposits (note 15) 3,174 3,174
Share investments (note 16) 77 13,504 13,581
Derivatives in gain (note 15) 2,352 2,352
Marketable securities (note 15) 533 299 26,649 27,481
IMF special drawing rights (note 15) 183 183
Total financial assets by designation 9,352 17,671 612 2,651 43,432 73,718

(c) Classes and categories of financial liabilities

Financial liabilities as at 30 June 2008 Designation
Amortised
cost
$m
Held for
trading
$m
Fair value
through P&L
$m
Total
$m
Issued currency 3,530 3,530
Accounts payable (note 22) 6,444 6,444
Taxes repayable (note 22) 4,451 4,451
Borrowings: (note 23)        
     Government stock 13,722 4,794 18,516
     Treasury bills 1,484 1,484
     Government retail stock 423 423
     Settlement deposits with Reserve Bank 7,750 7,750
     Derivatives in loss 1,591 1,591
     Finance lease liabilities 955 955
     Other borrowings 10,784 4,607 15,391
Total borrowings 25,884 1,591 18,635 46,110
Total financial liabilities by designation 40,309 1,591 18,635 60,535
Financial liabilities as at 30 June 2007 Designation
Amortised
cost
$m
Held for
trading
$m
Fair value
through P&L
$m
Total
$m
Issued currency 3,444 3,444
Accounts payable (note 22) 4,898 4,898
Taxes repayable (note 22) 3,179 3,179
Borrowings: (note 23)
     Government stock 12,873 2,905 15,778
     Treasury bills 2,098 2,098
     Government retail stock 364 364
     Settlement deposits with Reserve Bank 7,507 7,507
     Derivatives in loss 1,126 1,126
     Finance lease liabilities 954 954
     Other borrowings 7,920 350 5,801 14,071
Total borrowings 22,111 1,476 18,311 41,898
Total financial liabilities by designation 33,632 1,476 18,311 53,419

Note 32: Financial Instruments (continued)

(d) Market risk

The Government's activities expose it primarily to the financial risks of changes in interest rates (see (e) below), foreign exchange rates (see (f) below) and equity markets (see (g) below). 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 each entity.

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, or more precisely the Crown reporting entities that manage the Government's portfolios, manage and measure risks from the year ended 30 June 2007.

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.
(d) Market risk (continued)
Derivatives as at 30 June 2008 Carrying value
in gain
$m
Notional value
in gain
$m
Carrying value
in loss
$m
Notional value
in loss
$m
Net carrying
value
$m
Foreign exchange contracts 206 6,028 510 15,524 (304)
Foreign exchange options 5 320 12 5
Cross currency swaps 570 2,861 521 2,985 49
Interest rate swaps 347 17,786 218 9,244 129
Interest rate options 25 110
Futures 1,119 1 303 (1)
Other derivatives 435 8,553 341 4,264 94
Total derivatives 1,563 36,692 1,591 32,442 (28)
Derivatives as at 30 June 2007 Carrying value
in gain
$m
Notional value
in gain
$m
Carrying value
in loss
$m
Notional value
in loss
$m
Net carrying
value
$m
Foreign exchange contracts 901 15,669 292 4,000 609
Foreign exchange options 11 143 11
Cross currency swaps 872 4,053 470 2,614 403
Interest rate swaps 372 16,334 346 8,949 27
Interest rate options 1 40 1
Futures 1 290 3 708 (2)
Other derivatives 192 4,315 15 1,066 177
Total derivatives 2,352 40,845 1,126 17,338 1,226

Some derivatives are reported using the hedge accounting approaches available under financial reporting standards. These approaches permit the effective portion of a cash flow hedging instrument to be initially reported in equity and subsequently transferred to the statement of financial performance or value of the hedged asset, while 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 are:

Carrying value
in gain
$m
Carrying value
in loss
$m
Net carrying
value
$m
Hedge accounted derivatives as at 30 June 2008      
Derivatives hedging fair value 1 64 (63)
Derivatives hedging cash flows 343 338 5
Hedge accounted derivatives as at 30 June 2007
Derivatives hedging fair value 122 (122)
Derivatives hedging cash flows 109 212 (103)

As a result of fair value hedge accounting, the hedged items were adjusted by a loss of $22 million (2007: gain of $59 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 affect the operating balance are:

>12 months
$m
1-2 years
$m
2-5 years
$m
>5 years
$m
Total
$m
As at 30 June 2008          
Timing of cash flows (135) (15) 13 (137)
Effect on operating balance (160) 19 42 (84) (183)
As at 30 June 2007
Timing of cash flows (193) (10) 4 (1) (200)
Effect on operating balance (103) (11) 9 11 (94)

(e) 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 value of instruments measured at fair value through profit and loss. The Government does not have material exposure to foreign interest rates.

The sensitivity analyses below have 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.

(e) Interest rate risk management (continued)

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 hedging via interest rate derivatives.

Change in New Zealand Interest Rates Impact on operating balance Impact on net worth
2008
$m
2007
$m
2008
$m
2007
$m
Increase 1% (100 basis points) (408) (379) (401) (369)
Decrease 1% (100 basis points) 467 444 459 433

The Government's sensitivity to interest rates has not materially changed from the previous year.

(f) Foreign currency risk management

The Government undertakes transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The carrying amounts of the Government's foreign currency denominated financial assets and financial liabilities translated to NZD at the reporting date are as follows:

As at 30 June 2008 NZD
NZ$m
USD
NZ$m
Yen
NZ$m
Euro
NZ$m
Other
NZ$m
Total
NZ$m
Cash and cash equivalents 2,745 517 97 115 330 3,804
Tax receivables 7,398 7,398
Levies, fines and penalty receivables 3,106 3,106
Social benefit receivables 440 440
Trade and other receivables 2,778 185 31 97 123 3,214
Student loans 6,741 6,741
Kiwibank mortgages 5,581 5,581
Other advances 622 4 626
Long-term deposits 1,968 409 31 83 296 2,787
Share investments 1,949 5,715 621 1,190 3,489 12,964
Derivatives in gain 13,575 (11,696) (1,224) 43 865 1,563
Marketable securities 7,650 21,345 1,686 4,996 974 36,651
IMF special drawing rights 188 188
Total financial assets 54,553 16,475 1,242 6,524 6,269 85,063
Issued currency 3,530     3,530
Accounts payable 5,674 323 31 279 137 6,444
Taxes repayable 4,451 4,451
Government stock 18,516 18,516
Treasury bills 1,484 1,484
Government retail stock 423 423
Settlement deposits with Reserve Bank 7,750 7,750
Derivatives in loss (16,296) 9,975 860 4,491 2,561 1,591
Finance lease liabilities 606 349 955
Other borrowings 11,543 2,288 358 1,202 15,391
Total financial liabilities 37,681 12,935 1,249 4,770 3,900 60,535
Net financial currency holdings 16,872 3,540 (7) 1,754 2,369 24,528

(f) Foreign currency risk management (continued)

As at 30 June 2007 NZD
NZ$m
USD
NZ$m
Yen
NZ$m
Euro
NZ$m
Other
NZ$m
Total
NZ$m
Cash and cash equivalents 2,875 900 55 147 185 4,162
Tax receivables 6,369 6,369
Levies, fines and penalty receivables 2,589 2,589
Social benefit receivables 394 394
Trade and other receivables 2,597 50 2 7 49 2,705
Student loans 6,011 6,011
Kiwibank mortgages 3,637 3,637
Other advances 1,078 2 1,080
Long-term deposits 2,109 684 15 172 194 3,174
Share investments 2,165 5,650 633 1,337 3,796 13,581
Derivatives in gain 26,718 (20,092) (1,301) (1,611) (1,362) 2,352
Marketable securities 4,996 18,368 530 2,694 893 27,481
IMF special drawing rights 183 183
Total financial assets 61,538 5,560 (66) 2,746 3,940 73,718
Issued currency 3,444 3,444
Accounts payable 4,807 19 1 1 70 4,898
Taxes repayable 3,179 3,179
Government stock 15,778 15,778
Treasury bills 2,098 2,098
Government Retail stock 364 364
Settlement deposits with Reserve Bank 7,507 7,507
Derivatives in loss (688) (176) (275) 1,556 710 1,126
Finance lease liabilities 642 312 954
Other borrowings 9,568 2,892 458 17 1,137 14,071
Total financial liabilities 46,699 3,046 184 1,574 1,916 53,419
Net financial currency holdings 14,839 2,514 (250) 1,172 2,024 20,299

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

Impact on operating balance Impact on net worth
2008
$m
2007
$m
2008
$m
2007
$m
Strengthen by 10% (961) (474) (830) (541)
Weaken by 10% 860 364 819 444

The Government's sensitivity to foreign currency has increased during the current period mainly in relation to financial instrument portfolios held by NZDMO, the Reserve Bank and ACC.

(g) Other price risks

The Government is exposed to share price risks arising from its holding of share investments.

Share price 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 analyses below have been determined based on the New Zealand Superannuation Fund's, ACC's and EQC's exposure to share price risks at the reporting date. The combined portfolios of these three portfolios makes up 96% (2007: 96%) of the Government's total share investments.

Change in share prices Impact on operating balance Impact on net worth
2008
$m
2007
$m
2008
$m
2007
$m
Strengthen/weaken by 10% 1,275 1,334 1,275 1,334

The Government's sensitivity to share prices has not changed significantly from the prior year.

Note 32: Financial Instruments (continued)

(h) Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The carrying value of financial assets equates to the maximum exposure to credit risk as at balance date.

The entities within the Government Reporting entity are responsible for managing their exposure to credit risk. The credit risk management of sub-entities with financial asset portfolios (excluding tax and student loan receivables) greater than $1,000 million are outlined on page 120.

The current New Zealand Sovereign credit rating from Standard & Poor's is AA+.

Entity Credit Risk Management
Reserve Bank

Credit risk for foreign reserves management is monitored and managed daily. Exposures are controlled through comprehensive individual counterparty and issuer credit limits. Individual credit limits are set on the basis of the rating of the counterparty or issuers. The Bank also manages credit risk by receiving collateral. Collateral is likely to take the form of cash or government securities. The value of collateral held is required to be within a prescribed range of the value of the exposure to the counterparty. Valuations are updated daily and as a result additional collateral may be called for or excess collateral returned to the counterparty.

The Domestic Market Operations function gives rise to credit risk primarily by transacting foreign currency swaps and reverse repurchase transactions. The Bank accepts a wide range of pre-approved securities for reverse repurchase transactions. Acceptable securities include government securities, securities issued by registered banks, highly-rated entities including supranational organisations, local authorities and state-owned enterprises.

NZDMO NZDMO manages credit risk through the credit screening of counterparties, use of credit exposure limits, and collateral requirements. Credit exposures are maintained only with highly rated institutions for which the probability of default is low. To diversify credit exposure, NZDMO limits its exposure to any one institution. The creditworthiness of counterparties is continuously monitored. Credit risk is further controlled by incorporating credit support annexes into master swap agreements with swap and foreign exchange counterparties.
NZS Fund The instruments managers may use, and the credit worthiness of the counterparties, are detailed in the investment management agreements with managers.  Derivative contracts and other particular investments entered into must be with entities that have an appropriate minimum credit rating as determined by an international credit rating agency.
EQC The Commission reduces counterparty risk by investing funds only in securities with approved New Zealand banks with satisfactory credit ratings and which have significant presence in the New Zealand market.  Exposure to any one bank is restricted in accordance with the Commission's investment policy.
ACC ACC's investment committee has approved an authorised set of credit criteria (and in the case of New Zealand banks, an authorised list of bank counterparties) which are subject to credit limits and portfolio limits.  The riskier a credit (the lower the credit rating and the more likely a default), the lower the approved credit limit.  Investment in unrated debt is allowed if approved by ACC's credit committee.  All transactions involving fixed interest income security, derivative financial instruments and security lending must be undertaken with authorised banks or approved counterparties which have a long term Standard and Poor's credit rating of AA- or better.  Rating information is supplied by independent rating agencies.  ACC's exposure and the credit ratings of its counterparties are continuously monitored.
Air New Zealand

Air New Zealand places cash, short term deposits and derivative financial instruments with good credit quality counterparties, having a minimum Standard and Poors credit rating of A.  Limits are placed on the exposure to any one financial institution.

Credit evaluations are performed on all customers requiring direct credit.  Air New Zealand is not exposed to any concentrations of credit risk within receivables, other assets and derivatives.  Air New Zealand does not require collateral or other security to support financial instruments with credit risk.  A significant proportion of receivables are settled through the International Aviation Travel Association (IATA) clearing mechanism which undertakes its own credit review of members.

NZ Post (including Kiwibank)

NZ Post has policies and processes for managing risks: specific policy benchmarks and parameters set by its Board.  The policy benchmarks are measured and monitored on an on-going basis.

Kiwibank's credit risks arise from lending to customers and from inter-bank, treasury, international and capital market activities.  Key elements of the management framework are:

  • The Board of Kiwibank employs a structure of delegated authorities to implement and monitor the multiple facets of credit risk management.
  • The overall composition and quality of the credit portfolios is monitored taking into account the potential changes in economic conditions.
  • Kiwibank has clearly defined credit underwriting policies and standards for all lending.
  • Credit exposures are monitored regularly through the examination of irregular and delinquent accounts.
  • Operationally, credit risk is controlled through a combination of approvals, limits, monitoring and review procedures.

(h) Credit risk management (continued)

Concentrations of credit exposure classified by credit rating, geography and industry of the counterparty are

provided in the following tables.

Concentration of credit exposure by credit rating (using the lower rating of Standard & Poor's or Moody's)

As at 30 June 2008 AAA
$m
AA
$m
A
$m
Other
$m
Non-rated
$m
Total
$m
Cash and cash equivalents 551 2,592 45 36 580 3,804
Tax receivables (note 14)1 7,398 7,398
Levies, fines and penalty receivables (note 14) 3,106 3,106
Social benefit receivables (note 14) 440 440
Trade and other receivables (note 14) 3,214 3,214
Student loans (note 17) 6,741 6,741
Kiwibank mortgages (note 17)2 5,581 5,581
Other advances (note 17) 15 96 515 626
Long-term deposits (note 15) 280 2,436 54 1 16 2,787
Derivatives in gain (note 15) 55 1,231 43 68 166 1,563
Marketable securities (note 15) 18,046 9,330 1,278 4,375 3,622 36,651
IMF special drawing rights (note 15) 188 188
Share investments (note 16) 158 587 1,337 4,976 5,906 12,964
Total credit exposure by credit rating 19,090 16,191 2,757 9,740 37,285 85,063
As at 30 June 2007 AAA
$m
AA
$m
A
$m
Other
$m
Non-rated
$m
Total
$m
Cash and cash equivalents 782 2,845 43 16 476 4,162
Tax receivables (note 14)1 6,369 6,369
Levies, fines and penaltyreceivables (note 14) 2,589 2,589
Social benefit receivables (note 14) 394 394
Trade and other receivables (note 14) 2,705 2,705
Student loans (note 17) 6,011 6,011
Kiwibank mortgages (note 17)2 3,637 3,637
Other advances (note 17) 562 75 443 1,080
Long-term deposits (note 15) 557 2,586 9 22 3,174
Derivatives in gain (note 15) 82 2,061 30 78 101 2,352
Marketable securities (note 15) 12,043 8,947 986 2,806 2,699 27,481
IMF special drawing rights (note 15) 183 183
Share investments (note 16) 200 683 1,640 5,905 5,153 13,581
Total credit exposure by credit rating 13,664 17,684 2,699 9,072 30,599 73,718

1. In determining the recoverability of tax receivables Inland Revenue uses information about the extent to which the taxpayer 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. Credit ratings of taxpayers are not relevant to the tax collection process and therefore tax receivables have been classified as non-rated.

2. Kiwibank mortgages consist mainly of residential lending. Therefore these financial assets have been classified as non-rated for the purposes of credit risk.

Note 32:  Financial Instruments (continued)

(h) Credit risk management (continued)

Concentration of credit exposure by geographical area:

As at 30 June 2008 United States
of America
$m
Europe
$m
Japan
$m
Australia
$m
New Zealand
$m
Supra-
national
$m
Other
$m
Total
$m
Cash and cash equivalents 441 170 96 134 2,357 4 602 3,804
Tax receivables (note 14) 7,398 7,398
Levies, fines and penalty receivables (note 14) 3,106 3,106
Social benefit receivables (note 14) 440 440
Trade and other receivables (note 14) 3,214 3,214
Student loans (note 17)1 6,741 6,741
Kiwibank mortgages (note 17) 5,581 5,581
Other advances (note 17) 10 615 1 626
Long-term deposits (note 15) 261 75 1 27 2,227 196 2,787
Derivatives in gain (note 15) 318 291 1 246 691 16 1,563
Marketable securities (note 15) 4,200 16,434 1,667 2,009 7,221 2,397 2,723 36,651
IMF special drawing rights (note 15) 188 188
Share investments (note 16) 4,069 3,361 927 1,460 2,155 992 12,964
Total credit exposure by geographical area 9,299 20,331 2,692 3,876 41,746 2,589 4,530 85,063

1. At 30 June 2008 14.5% of student loan borrowers were overseas. The majority of these individuals are overseas for a short time and therefore the credit risk is not significantly impacted by their current location.

Concentration of credit exposure by geographical area:

As at 30 June 2007 United States
of America
$m
Europe
$m
Japan
$m
Australia
$m
New Zealand
$m
Supra-
national
$m
Other
$m
Total
$m
Cash and cash equivalents 872 62 50 37 3,082 7 52 4,162
Tax receivables (note 14) 6,369 6,369
Levies, fines and penalty receivables (note 14) 2,589 2,589
Social benefit receivables (note 14) 394 394
Trade and other receivables (note 14) 2,705 2,705
Student loans (note 17)1 6,011 6,011
Kiwibank mortgages (note 17)     3,637   3,637
Other advances (note 17) 545 535 1,080
Long-term deposits (note 15) 554 110 1 52 2,429 28 3,174
Derivatives in gain (note 15) 298 544 448 999 63 2,352
Marketable securities (note 15) 3,933 12,310 1,023 1,715 4,936 2,654 910 27,481
IMF special drawing rights (note 15) 183 183
Share investments (note 16) 4,087 3,624 957 1,625 2,393 895 13,581
Total credit exposure by geographical area 10,289 16,650 2,031 3,877 36,079 2,844 1,948 73,718

1. At 30 June 2007 12.9% of student loan borrowers were overseas. The majority of these individuals are overseas for a short time and therefore the credit risk is not significantly impacted by their current location.

Note 32:  Financial Instruments (continued)

 (h) Credit risk management (continued)

Concentration of credit exposure by industry:

As at 30 June 2008 Sovereign
issuers
$m
Supra-
national
$m
NZ banking
sector
$m
Foreign banking
sector
$m
Other
$m
Other
Individual
$m
Total $m
Cash and cash equivalents 484 4 2,394 381 541 3,804
Tax receivables (note 14)1 7,398 7,398
Levies, fines and penalty receivables (note 14) 3,106 3,106
Social benefit receivables (note 14) 440 440
Trade and other receivables (note 14) 3,214 3,214
Student loans (note 17) 6,741 6,741
Kiwibank mortgages (note 17)2 5,581 5,581
Other advances (note 17) 108 11 178 329 626
Long-term deposits (note 15) 261 2,227 299 2,787
Derivatives in gain (note 15) 388 786 389 1,563
Marketable securities (note 15) 6,383 2,499 921 7,743 19,105 36,651
IMF special drawing rights (note 15) 188 188
Share investments (note 16) 2 446 12,471 45 12,964
Total credit exposure by industry 7,128 2,691 6,040 9,666 43,296 16,242 85,063

1. In determining the recoverability of tax receivables Inland Revenue uses information about the extent to which the taxpayer 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. The industry of taxpayers is not relevant to the collection process and therefore tax receivables have been classified as other.

2. Kiwibank mortgages consist mainly of residential lending. Therefore these financial assets have been classified as other individual for the purposes of credit risk.

Concentration of credit exposure by industry:

As at 30 June 2007 Sovereign
issuers
$m
Supra-
national
$m
NZ banking
sector
$m
Foreign banking
sector
$m
Other
$m
Other
Individual
$m
Total
$m
Cash and cash equivalents 667 4 2,607 454 430 4,162
Tax receivables (note 14)1 6,369 6,369
Levies, fines and penalty receivables (note 14) 2,589 2,589
Social benefit receivables (note 14) 394 394
Trade and other receivables (note 14) 2,705 2,705
Student loans (note 17) 6,011 6,011
Kiwibank mortgages (note 17)2 3,637 3,637
Other advances (note 17) 97 736 247 1,080
Long-term deposits (note 15) 554 2,416 196 8 3,174
Derivatives in gain (note 15) 764 1,218 370 2,352
Marketable securities (note 15) 4,724 2,654 747 7,836 11,520 27,481
IMF special drawing rights (note 15) 183 183
Share investments (note 16) 3 646 12,901 31 13,581
Total credit exposure by industry 5,945 2,841 6,634 10,350 35,039 12,909 73,718

1. In determining the recoverability of tax receivables Inland Revenue uses information about the extent to which the taxpayer 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. The industry of taxpayers is not relevant to the collection process and therefore tax receivables have been classified as other.

2. Kiwibank mortgages consist mainly of residential lending. Therefore these financial assets have been classified as other individual for the purposes of credit risk.

Note 32:  Financial Instruments (continued)

(h) Credit risk management (continued)

The credit quality of financial assets that are neither past due nor impaired (using the lower of Standard & Poor's or Moody's rating) are:

Concentration of credit quality by credit rating for financial assets neither past due nor impaired - loans, marketable securities, deposits and derivatives in gain

As at 30 June 2008 AAA
$m
AA
$m
A
$m
Other
$m
Non-rated
$m
Total
$m
Kiwibank mortgages (note 17) 5,555 5,555
Other advances (note 17) 39 480 519
Long-term deposits (note 15) 280 2,436 54 1 16 2,787
Derivatives in gain (note 15) 55 1,231 43 68 166 1,563
Marketable securities (note 15) 18,046 9,330 1,278 4,375 3,622 36,651
Total credit exposure by credit rating 18,381 13,036 1,375 4,444 9,839 47,075
As at 30 June 2007 AAA
$m
AA
$m
A
$m
Other
$m
Non-rated
$m
Total
$m
Kiwibank mortgages (note 17) 3,628 3,628
Other advances (note 17) 543 408 951
Long-term deposits (note 15) 557 2,586 9 22 3,174
Derivatives in gain (note 15) 82 2,061 30 78 101 2,352
Marketable securities (note 15) 12,043 8,947 986 2,806 2,699 27,481
Total credit exposure by credit rating 12,682 14,137 1,016 2,893 6,858 37,586

Financial asset portfolios administered by Inland Revenue and the Ministry of Social Development are excluded

from the above analysis as discussion on credit risk is included in notes 14 and 17.

In some instances, financial assets would be reported as either past their due date or impaired if it were not for the fact that their terms had been renegotiated. The carrying value of these renegotiated assets is:

  30 June
2008
$m
30 June
2007
$m
Financial assets  26 3

(i)  Liquidity risk management

Liquidity risk refers to the loss due to the lack of liquidity preventing quick or cost-effective liquidation of products, positions or portfolios.

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

The following table details the Government's remaining contractual maturity for its financial liabilities. The table has been drawn up based on:

  • the undiscounted cash flows of financial liabilities based on the earliest date on which the Government can be required to pay, and
  • both interest and principal cash flows.
As at 30 June 2008 Carrying
value
$m
Contractual
cash flows
$m
0-12 months
$m
1-2 years
$m
2-5 years
$m
5-10 years
$m
> 10 years
$m
Issued currency 3,530 3,530 3,530
Accounts payable 6,444 6,601 6,503 93 5
Taxes repayable 4,451 4,451 4,451
Government stock 18,516 22,841 3,761 4,792 8,142 6,146
Treasury bills 1,484 1,497 1,497
Government retail stock 423 434 397 37
Settlement deposits with Reserve Bank 7,750 7,750 7,750
Finance lease liabilities 955 1,304 130 123 342 708 1
Other borrowings 15,391 16,430 9,768 823 2,208 2,989 642
Total non-derivative liabilities 58,944 64,838 37,787 5,868 10,697 9,843 643
Derivatives in loss settled net 1,591 662 418 60 40 105 39
Derivatives settled gross:            
 - inflow   40,239 28,576 2,364 4,701 4,490 108
 - outflow   39,724 28,744 2,168 4,392 4,296 124

(i) Liquidity management

As at 30 June 2007 Carrying
value
$m
Contractual
cash flows
$m
0-12 months
$m
1-2 years
$m
2-5 years
$m
5-10 years
$m
> 10 years
$m
Issued currency 3,444 3,444 3,444
Accounts payable 4,898 5,195 5,092 97 6
Taxes repayable 3,179 3,179 3,179
Government stock 15,778 20,447 979 3,598 8,031 5,215 2,624
Treasury bills 2,098 2,118 2,118
Government Retail stock 364 372 329 35 8
Settlement deposits with Reserve Bank 7,507 7,507 7,507
Finance Lease Liabilities 954 956 93 71 194 597 1
Other borrowings 14,071 14,783 9,090 940 1,215 3,234 304
Total non-derivative liabilities 52,293 58,001 31,831 4,741 9,454 9,046 2,929
Derivatives in loss settled net 1,126 519 226 63 109 120 1
Derivatives settled gross:              
 - inflow 36,518 25,975 2,259 3,414 3,691 1,179 36,518
 - outflow 34,377 24,640 2,097 3,079 3,440 1,121 34,377

The Government has access to financing facilities, of which the total unused amount at 30 June 2008 was $1,044 million (2007: $1,457 million). The Government expects to meet its obligations from operating cash flows, from the results of bond tenders, and proceeds of maturing financial assets.

Note 33:  Impact of Adoption of NZ IFRS

The aim of this section is to explain how the transition from previous GAAP to NZ IFRS has affected the reported financial position and financial performance of the Government of New Zealand.

The Government is reporting in compliance with NZ IFRS for periods beginning on and after 1 July 2007. Previous reporting has been on the basis of approved accounting standards applicable in New Zealand at the time. The following pages describe the impact of the adoption of NZ IFRS by providing reconciliations between the previous GAAP and the comparative information shown in these financial statements for:

  • net worth as at 1 July 2006 and as at 30 June 2007, and
  • the operating balance for the year ended 30 June 2007.

In addition to changes in measurement and recognition rules, NZ IFRS has resulted in a number of changes to the format of the financial statements. The major reclassifications are:

  • depreciation and amortisation previously classified under operating expenses now separately disclosed
  • share investments previously classified under marketable securities now separately disclosed
  • some properties held by Land Information New Zealand (LINZ) have been reclassified from assets for sale to property, plant and equipment and as a result have been fair valued
  • settlement deposits with the Reserve Bank previously classified under borrowings - sovereign guaranteed now separately disclosed
  • separation of borrowings between sovereign guaranteed and non-sovereign guaranteed no longer in the statement of financial position (transferred to the statement of borrowings)
  • payables and provisions previously classified as one category now split
  • some interest, dividend income, and interest expense are now classified as gains and losses on financial instruments
  • sales of goods and services are now classified as other revenue and vice versa, and
  • social assistance in relation to ACC payments is now classified under insurance expenses.
Note
As at
1 July 2006
$m
As at
30 June 2007
$m
Net worth per published accounts (previous GAAP) 71,403 95,836
Rail network valuation a 10,330    - 
Increase in investment in associates a 277    - 
Amended net worth (previous GAAP) 82,010 95,836
Changes as a result of transition to NZ IFRS
Revaluation of GSF b 3,133 3,234
Inclusion of a risk premium on ACC liability c (1,603) (1,976)
Inclusion of derivatives d 304 (386)
Fair value adjustments to receivables e (369) (481)
Revaluation of NPF liability f 195 178
Goodwill amortisation g    -  98
Increase in investment in associates h 73 172
Other movements 228 152
Net worth per NZ IFRS published accounts 83,971 96,827
Note Year to
30 June 2007
$m
Operating balance published accounts (previous GAAP) 8,663
Changes as a result of transition to NZ IFRS
Revaluation of GSF b 4
Inclusion of a risk premium on ACC liability c (373)
Inclusion of derivatives d (226)
Fair value adjustments to receivables e (202)
Revaluation of NPF liability f (12)
Goodwill amortisation g 98
Other movements 70
Operating balance per NZ IFRS published accounts 8,022

Notes to the NZ IFRS Transition

a) On 1 July 2006 the accounting policy regarding the valuation basis of the rail network changed to depreciated replacement cost. Previously this asset was reported at historical cost. In addition, the Crown’s investment in Massey University increased on 1 July 2006 by $277 million in relation to asset revaluations.

b) The reporting of the Government Superannuation Fund (GSF) has changed due to applying a specific standard for employee benefits, including pension schemes, under NZ IFRS. The main changes to the financial statements were:

  • a reduction in the net liability of GSF due to valuing the liability on the basis that the Government meets its obligation on a pay-as-needed basis, rather than the amount to be invested today to fully fund future contributions under pre adoption of NZ IFRS. This latter approach assumes the Fund would invest in assets that would generate revenue on which there would be an additional obligation to pay tax, and
  • a netting of GSF plan assets against the pension liability (nil impact on net worth).

c) The reporting of the ACC liability has changed owing to new requirements under NZ IFRS. The main changes to the financial statements were:

  • the ACC liability has increased due to adding an additional risk premium and liability adequacy test on the unearned levy liability to meet estimated future claims. The actuarially calculated liability under pre adoption of NZ IFRS represented a mid-point estimate - that is, equal chance of actual payouts being greater than or less than the estimate. To that extent, it represented the most likely outcome. Introducing an additional risk premium and liability adequacy test under NZ IFRS does not change the relative risk of ACC's activities; rather it simply changes how this risk is reported, and
  • changes to the presentation of the unearned levy liability (nil impact on net worth).

d) Under NZ IFRS all derivative contracts must be recognised in the statement of financial position at fair value.

e) Receivables from taxes and fines have been written down to reflect the time value of money and collection costs.

f) The reduction in the National Provident Fund (NPF) liability is due to the tax effect of valuing the liability on the basis of determining present value of payments to this scheme under current arrangements, rather than the current approach which determines what payment would be required today to settle all future obligations.

g) Under NZ IFRS goodwill is not amortised over a specified period. Instead, an annual impairment test is conducted.

h) The Crown’s investment in Christchurch and Invercargill airports was deemed significant influence under NZ IFRS increasing the investment at 1 July 2006 and 30 June 2007 by $73 million and $172 million respectively.

Note 34:  Subsequent Events

On 1 July 2008, negotiations were completed and an agreement was signed for the purchase of 100% of the shares in Toll (New Zealand) Limited. Prior to the acquisition, assets and operations not integral to the rail operation were separated out of Toll (New Zealand) Limited. On acquisition by the Government, the company was renamed KiwiRail Limited.

Ownership of the rail business is intended to place the Government in a better position to integrate rail planning and funding with its wider transport policy, and to ensure capital investment for improving the rolling stock.

The cost of acquisition of the company was $690 million, settled in cash on 1 July. The assets acquired and liabilities assumed as a result of this purchase will be consolidated into the Financial Statements of Government from 1 July 2008, and the process to identify and value these individual items in accordance with NZ IFRS 3 Business Combinations has begun. Until this task is completed, an estimation of the full financial effect of this acquisition is not available.

Statement of Borrowings

as at 30 June 2008

Statement of Borrowings as at 30 June 2008
Forecast
Actual
Original Budget
$m
Estimated Actuals
$m

30 June 2008
$m
30 June 2007
$m


Borrowings  
17,732 18,683 Government stock[1] 18,516 15,778
2,786 1,389 Treasury bills 1,484 2,098
358 386 Government retail stock 423 364
7,523 7,465 Settlement deposits with Reserve Bank 7,750 7,507
300 780 Derivatives in loss[2] 1,591 1,126
958 1,251 Finance lease liabilities 955 954
16,707 15,592 Other borrowings 15,391 14,071
46,364 45,546 Total borrowings[3] 46,110 41,898
33,167 32,912 Sovereign-guaranteed debt[4] 33,192 31,163
13,197 12,634 Non-sovereign debt 12,918 10,735
46,364 45,546 Total borrowings[3] 46,110 41,898

Notes on Borrowings

  • [1]Government stock includes $295 million of infrastructure bonds.
  • [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 within the Statement of Borrowings, primarily due to exchange rate movements.
  • [3]Total Borrowings (Gross Debt) is the total borrowings (both sovereign-guaranteed and non-sovereign guaranteed) of the total Crown. This equates to the amount in the total Crown balance sheet and represents the complete picture of whole-of-Crown debt obligations to external parties.
  • [4]Total Borrowings (Gross Debt) can be split into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that borrowings by SOEs and Crown entities is not explicitly guaranteed by the Crown. No debt of SOEs and Crown entities is currently guaranteed by the Crown.

Statement of Unappropriated Expenditure

for the year ended 30 June 2008

An appropriation is a statutory authorisation by Parliament for the incurring of expenses or capital expenditure. This Statement reports expenses or capital expenditure without appropriation and in excess, or outside the scope, of existing appropriations. This Statement also reports breaches of projected net asset balance limits set by section 22(3) of the Public Finance Act 1989.

Section 26B of the Public Finance Act 1989 authorises the Minister of Finance to approve limited amounts of expenses or capital expenditure in excess of, but within the scope, of an existing appropriation. Unappropriated amounts incurred in terms of such an approval are shown separately in this Statement.

Expenses or capital expenditure incurred without or outside the scope of appropriation or any other authority is unlawful unless validated by Parliament. Unappropriated expenses or capital expenditure in excess of the limits which the Minister of Finance can approve under section 26B of the Public Finance Act 1989 require validating legislation. Such validating legislation will be accompanied by a report to the House of Representatives that sets out the unappropriated items together with an explanation of the Minister Responsible for the expenses or capital expenditure.

Amounts in this Statement are expressed in thousands of dollars, reflecting the level at which appropriations are made.

Unappropriated expenditure approved under Section 26B of the Public Finance Act 1989
Department
Vote
Appropriation Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Appropriation
$000
Department of Building and Housing


Housing Benefit and Other Unrequited Expenses

Benefit and Other Unrequited Expenses
Income Related Rental Subsidy 463,363 1,802
Department of Corrections


Corrections Departmental Output Expenses

Departmental Output Expenses
Community-Based Sentences and Orders[1] 105,149 584
  Custody of Remand Prisoners[2] 128,061 591
  Information Services[3] 41,176 194
  Prisoner Employment[4] 45,067 84
  Rehabilitative Progammes and
Reintegrative Services[5]
56,928 273
Crown Law Office


Attorney-General Departmental Output Expenses

Departmental Output Expenses
Supervision and Conduct of Crown Prosecutions 34,515 168
Government Communications Security Bureau


Communications Security and Intelligence Intelligence and Security Department
Expenses and Capital Expenditure


Intelligence and Security Department Expenses and Capital Expenditure
Communications Security and Intelligence 40,345 788
Department of Internal Affairs


Ministerial Services Other Expenses to be Incurred by the Crown

Other Expenses to be Incurred by the Crown
Ministers' Internal and External Travel 10,440 156

Notes

  • [1]The Supplementary Estimates of Appropriations of $104,909,000 has been increased by $240,000 by a transfer under section 26A of the Public Finance Act 1989.
  • [2]The Supplementary Estimates of Appropriations of $122,951,000 has been increased by $5,110,000 by a transfer under section 26A of the Public Finance Act 1989.
  • [3]The Supplementary Estimates of Appropriations of $39,216,000 has been increased by $1,960,000 by a transfer under section 26A of the Public Finance Act 1989.
  • [4]The Supplementary Estimates of Appropriations of $44,567,000 has been increased by $500,000 by a transfer under section 26A of the Public Finance Act 1989.
  • [5]The Supplementary Estimates of Appropriations of $59,128,000 has been decreased by $2,200,000 by a transfer under section 26A of the Public Finance Act 1989.

Statement of Unappropriated Expenditure (continued)

for the year ended 30 June 2008

Unappropriated expenditure approved under Section 26B of the Public Finance Act 1989 (continued)
Department
Vote
Appropriation Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Appropriation
$000
Department of Labour


Immigration Departmental Output Expenses

Departmental Output Expenses
Services to Position New Zealand as an
International Citizen with Immigration-Related
Interests and Obligations
16,553 46
Labour Departmental Output Expenses

Departmental Output Expenses
Services to Promote and Support the Safe
Management of Hazardous Substances in the
Workplace and Amusement Devices
4,533 5
Office of the Ombudsmen


Ombudsmen Departmental Output Expenses

Departmental Output Expenses
Investigation and Resolution of Complaints
about Government Administration
6,092 56
Parliamentary Commissioner
for the Environment



Parliamentary Commissioner
for the Environment
Departmental Output Expenses

Departmental Output Expenses
Reports and Advice 2,040 12
Ministry of Social Development


Social Development Benefit and Other Unrequited Expenses

Benefit and Other Unrequited Expenses
Orphans'/Unsupported Child's Benefit 80,616 6

Sickness Benefit 581,357 511

Special Benefit 71,055 129

Temporary Additional Support 53,246 692

Unemployment Benefit 456,694 986

Capital Expenditure to be Incurred by the Crown

Capital Expenditure to be Incurred by the Crown
Recoverable Assistance 118,287 876
Veterans' Affairs
- Social Development
Benefit and Other Unrequited Expenses

Benefit and Other Unrequited Expenses
Medical Treatment 18,884 340

War Disablement Pensions 133,235 1,076

Statement of Unappropriated Expenditure (continued)

for the year ended 30 June 2008

Unappropriated expenditure in excess of appropriation, with Cabinet approval to use imprest supply
Department
Vote
Appropriation Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Appropriation
$000
Ministry of Economic Development


Energy Non-Departmental Output Expenses

Non-Departmental Output Expenses
Maintenance and Operation of Whirinaki[1] 33,500 16,763
Ministry of Education


Education Other Expenses to be Incurred by the Crown

Other Expenses to be Incurred by the Crown
Early Childhood Education[2] 807,230 21,647
Department of Labour


Labour Non-Departmental Output Expenses

Non-Departmental Output Expenses
Employment Relations
Education Contestable Fund[3]
2,169 242
New Zealand Food Safety Authority


Food Safety Departmental Output Expenses


Response to Food Safety Emergencies[4] 355 288
New Zealand Police


Police Departmental Output Expenses

Departmental Output Expenses
Case Resolution and Support
to Judicial Process[5]
74,740 18,768
State Services Commission


State Services Departmental Output Expenses

Departmental Output Expenses
Government Shared Network[6] 13,221 8,491

Notes

  • [1]Additional authority of $40,000,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred.
  • [2]Additional authority of $23,800,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred.
  • [3]Additional authority of $330,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred.
  • [4]Additional authority of $297,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred.
  • [5]Additional authority of $19,444,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred.
  • [6]Additional authority of $15,146,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred.

Statement of Unappropriated Expenditure (continued)

for the year ended 30 June 2008

Unappropriated expenditure without appropriation or outside scope of an appropriation, with Cabinet approval to use imprest supply
Department
Vote
Appropriation Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Appropriation
$000
The Treasury


Finance Other Expenses to be Incurred by the Crown

Other Expenses to be Incurred by the Crown
Atihau-Whanganui Incorporation Ex-Gratia Payment[1] - 23,000

 

Unappropriated expenditure in excess of appropriation, without Cabinet approval to use imprest supply
Department
Vote
Appropriation Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Appropriation
$000
Ministry of Education


Education Other Expenses to be Incurred by the Crown

Other Expenses to be Incurred by the Crown
Interest Subsidy for Schools 740 116
Ministry of Health


Health Non-Departmental Output Expenses

Non-Departmental Output Expenses
National Maternity Services 109,576 15,048

Departmental Output Expenses


Administration of Legislation and Regulations[2] 19,826 3,012

Funding and Performance of Crown Entities[2] 7,982 1,235

Information Services[2] 45,190 1,139

Servicing of Ministers and Ministerial Committees[2] 13,810 474

Statement of Unappropriated Expenditure (continued)

for the year ended 30 June 2008

Unappropriated expenditure in excess of appropriation, without Cabinet approval to use imprest supply (continued)
Department
Vote
Appropriation Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Appropriation
$000
Inland Revenue Department


Revenue Benefits and Other Unrequited Expenses

Benefits and Other Unrequited Expenses
KiwiSaver:  Fee Subsidy 13,000 9,815

KiwiSaver:  Interest 4,800 252

KiwiSaver:  Kickstart Payment 663,000 43,662

KiwiSaver:  Member Tax Credit 248,000 80,731

Payroll Subsidy 820 142

Other Expenses to be Incurred by the Crown


Impairment of Debt Relating to Child Support 85,000 62,044

Impairment of Debt Relating to
General Tax and Family Support
150,000 95,239
Ministry of Justice


Courts Other Expenses to be Incurred by the Crown

Other Expenses to be Incurred by the Crown
Costs in Criminal Cases 300 301

Family Court Professional Services 30,740 771

MVDT Adjudicator Remuneration
and Assessors Costs
292 13
Ministry of Justice - OTS


Treaty Negotiations Departmental Output Expenses

Departmental Output Expenses
Policy Advice - Treaty Negotiations 11,213 1,391

Notes

  • [1]Additional authority of $23,000,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred.
  • [2]This figure was the authority provided by the Appropriation (2007/08 Estimates) Act 2007 plus in-year cabinet approvals, which together represent the authority in place when the in-year breach occurred.

Statement of Unappropriated Expenditure (continued)

for the year ended 30 June 2008

Unappropriated expenditure in excess of appropriation, without Cabinet approval to use imprest supply (continued)
Department
Vote
Appropriation Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Appropriation
$000
New Zealand Defence Force


Defence Force Departmental Output Expenses

Departmental Output Expenses
Fixed Wing Transport Forces[1] 174,948 408

Land Combat Forces[2] 328,882 98

Land Combat Service Support Forces[3] 137,584 224

Maritime Patrol Forces[4] 145,261 2,023

Rotary Wing Transport Forces[5] 118,309 302
New Zealand Police


Police Departmental Output Expenses

Departmental Output Expenses
Investigations[6] 336,389 9,846

Policy Advice and Ministerial Servicing[7] 1,728 940
Ministry of Transport


Transport Departmental Output Expenses

Departmental Output Expenses
Next Steps Review Implementation 2,400 343

Sector Leadership and Support[8] 1,785 258

Statement of Unappropriated Expenditure (continued)

for the year ended 30 June 2008

Non-Departmental Output Expenses

Unappropriated expenditure in excess of appropriation, without Cabinet approval to use imprest supply (continued)
Department
Vote
Appropriation Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Appropriation
$000
Department of Conservation


Conservation Capital Expenditure to be Incurred by the Crown

Capital Expenditure to be Incurred by the Crown

Crown Land Acquisitions

476 44,988
Inland Revenue Department


Revenue Non-Departmental Output Expenses

Non-Departmental Output Expenses
Retirement Commissioner 380
Other Expenses to be Incurred by the Crown
Other Expenses to be Incurred by the Crown


General Tax and Family Support Bad Debt Write-Offs 123,897
Ministry of Justice


Courts Other Expenses to be Incurred by the Crown

Other Expenses to be Incurred by the Crown
Personal Property Protection Rights Costs 1,700 571
The Treasury Capital Expenditure to be Incurred by the Crown

Finance Capital Expenditure to be Incurred by the Crown Landcorp Protected Land Agreement 64,200
Other Expenses to be Incurred by the Crown
Other Expenses to be Incurred by the Crown


Write-off of Capital Charge Receivable 3,180

Statement of Unappropriated Expenditure (continued)

for the year ended 30 June 2008

Net Assets

Section 22 of the Public Finance Act 1989 requires that the net asset holding of a department must not exceed the most recent projected balance of net assets for that department as set out in an Appropriation Act, except where Ministers agree a surplus may be retained or where assets or liabilities have been remeasured. The following schedule discloses departments that have breached this requirement during the year.

Excess departmental net asset holding, with Cabinet approval to use imprest supply
Department Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Net Asset Balance
Limit per
Appropriation
$000
Ministry of Foreign Affairs and Trade[9] 348,156 2,300
Department of Internal Affairs[10] 42,267 2,425

 

Excess departmental net asset holding, without Cabinet approval to use imprest supply
Department Supplementary
Estimates of
Appropriations
2007/08
$000
Amount in
Excess of
Net Asset Balance
Limit
$000
Ministry of Agriculture and Forestry 32,765 193
Archives New Zealand 64,749 4
Ministry of Economic Development 20,939 584
Ministry for the Environment 3,341 371
Ministry of Justice 634,609 183
National Library of New Zealand 105,410 397
Office of the Clerk 4,529 237

Notes

  • [1]The Supplementary Estimates of Appropriations of $178,023,000 has been reduced by $3,075,000 transferred out of this Output Class by the Public Finance (Transfers Between Outputs) Order 2008 (SR 2008/168).
  • [2]The Supplementary Estimates of Appropriations of $324,682,000 has been increased by $4,200,000 transferred into this Output Class by the Public Finance (Transfers Between Outputs) Order 2008 (SR 2008/168).
  • [3]The Supplementary Estimates of Appropriations of $135,134,000 has been increased by $2,450,000 transferred into this Output Class by the Public Finance (Transfers Between Outputs) Order 2008 (SR 2008/168).
  • [4]The Supplementary Estimates of Appropriations of $149,736,000 has been reduced by $4,475,000 transferred out of this Output Class by the Public Finance (Transfers Between Outputs) Order 2008 (SR 2008/168).
  • [5]The Supplementary Estimates of Appropriations of $118,859,000 has been reduced by $550,000 transferred out of this Output Class by the Public Finance (Transfers Between Outputs) Order 2008 (SR 2008/168).
  • [6]Additional authority of $7,649,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred, but the actual expense exceeded the additional authority.
  • [7]Additional authority of $934,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the expense being incurred, but the actual expense exceeded the additional authority.
  • [8]The Supplementary Estimates of Appropriations of $1,700,000 has been increased by $85,000 by a transfer under section 26A of the Public Finance Act 1989.
  • [9]Additional authority of $2,300,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the department increasing its net assets.
  • [10]Additional authority of $2,425,000 was granted subsequent to the Supplementary Estimates of Appropriations 2007/08 and prior to the department increasing its net assets.

Statement of Expenses or Capital Expenditure Incurred in Emergencies

for the year ended 30 June 2008

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

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

Statement of Trust Money

for the year ended 30 June 2008

Statement of Trust Money for the year ended 30 June 2008
Department
Trust Account
As at
30 June
2007
$000
Contributions
$000
Distributions
$000
Revenue
$000
Expense
$000
As at
30 June
2008
$000
Agriculture and Forestry            
Meat Board Levies Trust - 58,115 (58,129) 17 - 3
Audit            
South Pacific Association of
Supreme Audit Institutions Trust
22 - - - - 22
Building and Housing            
Certifiers Bond Trust 178 9 - - - 187
Licensed Building Practitioners-Trust[1][2] - - - - - -
Residential Tenancies Bond Trust 230,976 144,604 (115,135) - - 260,445
Residential Tenancies Bond
Trust -No.2 Account[2]
- - - - - -
Conservation            
Bonds/Deposits Trust 6,219 497 (273) 365 - 6,808
Conservation Project Trust 1,327 637 (759) 59 - 1,264
National Parks Trust 101 60 (122) 3 - 42
Walkways Trust 14 - - 1 - 15
Wildlife and Reserves Trusts[2] - - - - - -
Corrections            
Prisons Trust 841 14,611 (14,186) - - 1,266
Crown Law Office            
Legal Claims Trust 65 2,988 (2,933) - - 120
Culture and Heritage            
Australian Trust for Oral History
Archives Trust
1,505  - (105) 48 - 1,448
Dictionary of New Zealand-Biography Trust 259 - - 11 (8) 262
New Zealand Encyclopaedia Trust 1 - - - - 1
New Zealand Historical Atlas Trust 97 - - 9 - 106
New Zealand History Research Trust 1,531 - - 95 - 1,626
War History Trust[1] - 481 - 34 - 515
Customs            
Alcohol Liquor Advisory Council Trust 1,057 13,840 (13,817) - - 1,080
Customs Regional Deposit/Bonds
Trust No.1, No.2 & No.3
3,976 4,632 (5,125) - - 3,483
Heavy Engineering Research Association Trust 62 903 (892) - - 73
Maritime Safety Authority Trust[2] - - - - - -
New Zealand Customs Service
MDS Release Trust
114 5,202 (5,228) 11 - 99
New Zealand Customs Service
MDS Suspense Trust
26 4,654 (4,646) - - 34
Balance carried forward 248,371 251,233 (221,350) 655 (8) 278,899

Statement of Trust Money (continued)

Statement of Trust Money for the year ended 30 June 2008 (continued)
Department
Trust Account
As at
30 June
2007
$000
Contributions
$000
Distributions
$000
Revenue
$000
Expense
$000
As at
30 June
2008
$000
Balance brought forward 248,371 251,233 (221,350) 653 (8) 278,899
Economic Development            
Coal and Minerals Deposits Trust 263 - (17) 9 (5) 250
Official Assignee's Office Trust 9,526 12,377 (7,496) 852 (4,535) 10,724
Patent Co-operation Treaty Fees Trust 130 1,322 (1,222) 168 (178) 220
Petroleum Deposits Trust 1,086 - - 1 - 1,087
Proceeds of Crime Trust 4,089 3,273 (1,964) 353 (958) 4,793
Radio Frequencies Tender Trust 225 21,800 (21,910) 110 - 225
Education            
Code of Practice for Providers
who Enrol International
Students Trust
2,421 - - 3,837 (3,890) 2,368
Conferences Trust 2 - - - - 2
Fisheries            
MAF Overfishing Account Trust 4,054 9,281 (12,214) 305 (304) 1,122
MAF Fish Forfeit Property Trust 318 2,092 (971) 57 - 1,496
Foreign Affairs and Trade            
Cook Island Trust 3 3,072 (3,075) 68 - 68
Government Administration
Building, Niue Trust[2]
- - - - - -
Judicial Development Trust 391 1,500 (985) 37 - 943
New Zealand/France
Friendship Trust
13 137 (103) 2 - 49
Niue Trust 25,023 - (26,306) 1,283 - -
Samoa Trust - 443 (443) - - -
Pacific Gender and
Aid Effectiveness Trust[1]
- 63 - - - 63
Pacific Islands Chief of Police
Women's Advisory Network Trust[1]
- 312 - - - 312
Health            
Health Benefits Offices Trust 83 4,415,590 (4,415,039) - - 634
Medicines Review Objectors-
Deposit Trust[2]
- - - - - -
Inland Revenue            
Child Support
Agency Trust Account
24,109 185,778 (208,574) - - 1,313
KiwiSaver Employer Trust[2] - - - - - -
KiwiSaver Returned
Transactions Trust[2]
- - - - - -
Reciprocal Child Support
Agreement Trust
153 9,234 (9,258) - - 129
Balance carried forward 320,260 4,917,507 (4,930,927) 7,735 (9,878) 304,697

Notes

  • [1]New trust account
  • [2]Inoperative trust account
  • [3]Trust account closed
  • [4]Title of trust amended

Statement of Trust Money (continued)

Statement of Trust Money for the year ended 30 June 2008 (continued)
Department
Trust Account
As at
30 June
2007
$000
Contributions
$000
Distributions
$000
Revenue
$000
Expense
$000
As at
30 June
2008
$000
Balance brought forward  320,260  4,917,507  (4,930,927)  7,737  (9,880)  304,697
Internal Affairs




 
 New Zealand 1990
Scholarship Trust
 587  -  -  50  -  637
Unlimited Potential
ProgrammeTrust
 139  -  (12)  4  (131)  -
Vogel House Trust  -  1  (1)  -  -  -
Justice




 
Chief Electoral Trust[2]  -  -  -  -  -  -
Courts Law Trust  7,347  18,147  (15,485)  -  -  10,009
Employment Court Trust  131  220  (199)  -  -  152
Fines Trust  27,154  71,309  (71,837)  -  -  26,626
Foreign Currency Trust[2]  -  -  -  -  -  -
Maori Land Court Trust  52  -  -  22  (10)  64
Supreme Court Trust  34  -  -  97  (48)  83
Victims' Claims Trust  47  -  -  21  (56)  12
Labour




 
Employment Relations Service Trust  24  268  (274)  1  -  19
Industrial Relations Act Security
of Costs Trust
 6  -  -  -  -  6
New Zealand Immigration Service Trust  7,357  5,250  (5,625)  396  (27)  7,351
Land Information New Zealand




 
Crown Forestry Licences Trust  879  453,899  (448,199)  (416,805)  413,954  3,728
Deposits Trust  2,264  26  (156)  -  (1)  2,133
Endowment Rentals Trust  1  352  (352)  -  -  1
Hunter Gift for the Settlement
of Discharged Soldiers Trust
 51  4  -  -  -  55
National Library




 
Interloan Billing System Trust  5  -  -  391  (389)  7
Macklin Bequest Fund Trust  235  -  -  17  (20)  232
New Zealand Defence Force




 
New Zealand Defence Force Trust[3]  -  -  -  -  -  -
New Zealand Defence Force
- Year of the Veteran Trust
 12  -  -  -  -  12
Police




 
Bequests, Donations and Appeals Trust  62  -  -  300  (201)  161
Found Money Trust  184  -  -  160  (30)  314
Money in Custody Trust  8,843  -  -  5,494  (2,568)  11,769
Reparation Trust  8  -  -  10  (9)  9
Rewards Monies Trust[2]  -  -  -  -  -  -
Balance carried forward  375,682  5,466,983  (5,473,067)  (402,105)  400,584  368,077

STATEMENT OF TRUST MONEY (continued)

Department
Trust Account
As at
30 June
2007
$000
Contributions
$000
Distributions
$000
Revenue
$000
Expense
$000
As at
30 June
2008
$000
Balance brought forward  375,682  5,466,983  (5,473,067)  (402,105)  400,584  368,077
Social Development




 
 Australian Recovery Debt Trust  4  -  -  42  (42)  4
Australian Dollar Embargoed Arrears Trust  191  3,053  (2,922)  -  -  322
 Australian Dollar Reciprocal Trust[3]  -  -  -  -  -  -
Children and Young Persons and
Their Families Agency Trust[4]
 381  -  -  (381)  -  -
Maintenance Trust  47  -  -  999  (997)  49
Netherlands Recovery Debt Trust  1  -  -  43  (33)  11
Overseas Debt Recovery Trust[2]  -  -  -  -  -  -
WR Wallace Trust[4]  -