Part 1: The 2004-05 audited financial statements of the Government

Central government: Results of the 2004-05 audits.

1.1
The Auditor-General issued the audit opinion on the Financial Statements of the Government of New Zealand for the year ended 30 June 2005 (the Government financial statements) on 16 September 2005. This is the same date on which the Minister of Finance and the Secretary to the Treasury signed their Statement of Responsibility.

Unqualified opinion issued

1.2
The audit report appears on pages 22-23 of the Government financial statements. The report includes our unqualified opinion that those statements:

  • comply with generally accepted accounting practice in New Zealand; and
  • fairly reflect:
    • the Government of New Zealand’s financial position as at 30 June 2005; and
    • the results of its operations and cash flows for the year ended on that date.

1.3
As in previous years, the Treasury has provided a comprehensive commentary on the financial statements, which is presented on pages 6-19 of the Government financial statements.

1.4
The significant matters that arose during the 2004-05 audit of the Government financial statements are listed below and discussed in this Part:

  • Treasury and Crown sector performance (paragraphs 1.7 to 1.12);
  • rail assets (paragraphs 1.13 to 1.23);
  • student loans valuation (paragraphs 1.24 to 1.31);
  • fair value of other debtor portfolios (paragraphs 1.32 to 1.38);
  • the Kyoto Protocol provision (paragraphs 1.39 to 1.48);
  • Financial Reporting Standard No. 37: Consolidating Investments in Subsidiaries (paragraphs 1.49 to 1.55); and
  • tax revenue recognition (paragraphs 1.56 to 1.58).

1.5
We also discuss 3 matters that will affect future Government financial statements:

  • applying New Zealand equivalents to International Financial Reporting Standards (paragraphs 1.59 to 1.64);
  • the Public Finance Amendment Act 2004 (paragraphs 1.65 to 1.68); and
  • related party transactions (paragraphs 1.69 to 1.75).

1.6
The Part concludes with a discussion of the resolution of matters we have raised previously.

Significant matters arising from the 2004-05 audit

Treasury and Crown sector performance

1.7
Section 27(4)1 of the Public Finance Act 1989 states in relation to the annual financial statements of the Crown –

The Treasury shall forward the annual financial statements to the Auditor-General no later than the 31st day of August following the end of the financial year.

1.8
Under section 301 of the Public Finance Act 1989, the Auditor-General has 30 days after receiving the Government financial statements from the Treasury to issue the audit opinion. However, in recent years we have generally agreed an earlier date for issuing the audit opinion with the Treasury in the interests of timely reporting. This year we agreed to sign the audit opinion on 16 September.

1.9
The Treasury provided the first draft of the Government financial statements to us on 31 August 2005. However, this draft was not of a satisfactory standard. A number of the detailed schedules and notes did not tie in to the primary statements, and other detailed disclosures were not provided (for example, commitments, contingencies, financial instrument disclosures, statement of trust money). Because of time pressures, the Treasury had not been able to fully complete the financial statements by the statutory deadline and the draft financial statements had not been subject to the level of quality assurance that we would expect.

1.10
It was not until 9 September that we received a draft set of financial statements that we considered to be of a good standard. This was only 7 days before we signed our audit opinion. This meant that the consolidation audit team were under significant pressure to complete the consolidation audit within the remaining timeframe. The deadline was met, but not without difficulty.

1.11
We note that the performance of the Treasury in producing the draft Government financial statements was affected by the performance of some entities in the Crown sector. A number of these entities were late in submitting their financial information to the Treasury, and the quality of some of the information submitted to the Treasury did not meet our expectations. In particular, we were disappointed that a number of entities were not able to agree on the amounts of funding that had flowed between them during the year, before submitting their financial information for consolidation.

1.12
We have recommended that the Treasury:

  • review, in consultation with the entities in the Crown sector and our Office, the timetable for producing the 2006 Government financial statements, to ensure that a draft set of financial statements that has been subject to appropriate quality assurance can be provided to the audit team within the statutory deadline;
  • identify and take the steps necessary to ensure that the Treasury produces the Government financial statements within agreed deadlines and to the appropriate standard;
  • follow up with the chief executives of those entities that did not meet the agreed timetable for submitting consolidation information for the 2005 Government financial statements and those that submitted consolidation information with significant errors, as to the importance of timely and accurate information;
  • ensure that all entities are provided with clear guidance on how to complete the reporting schedules necessary for the Crown consolidation; and
  • remind entities of the importance of agreeing funding flows with other entities in the Crown sector, and specifically of the requirements under the Government financial statements elimination framework, to seek written confirmation of all intra-group flows in excess of $10 million.

Rail assets

1.13
The Crown entered into a number of agreements with Toll Holdings Limited (Toll) on 30 June 2004, including the purchase of the national rail infrastructure for one dollar and a track access agreement out to the year 2070. In our report at the end of the 2004 Government financial statements audit, we raised our concerns about the accounting treatment adopted by the Treasury for the rail assets.

1.14
In the 2005 Government financial statements, the Treasury has again assessed the rail access agreement with Toll as a finance lease and accounted for the rail infrastructure as a lessor’s interest in a finance lease. Under this accounting treatment, the Treasury has expensed the approximately $91 million of capital expenditure that the Crown has incurred on the rail network since 2004. The costs that the Treasury has expensed, rather than capitalised, include the expenditure to date from the $200 million that the Crown has committed to spend on replacement and upgrade of the national network, plus the capital expenditure on the Auckland commuter network (primarily the $23 million spent on double tracking).

1.15
We disagree with the accounting treatment adopted by the Treasury for the rail infrastructure assets. We do not consider it appropriate for the Crown to treat the significant capital expenditure incurred to date and planned for the future on the rail network as an operating expense. However, we have not qualified our audit opinion on the Government financial statements this year, because we do not consider the $91 million of capital expenditure incurred to date to be material to the Government financial statements as a whole. This may not be the case next year, as the Crown continues to invest in the rail network.

1.16
We have discussed this issue at length with the Treasury. The Treasury’s accounting treatment is based on its assessment that the agreements entered into with Toll are a finance lease, and, as there is no net income to the Crown from the rail assets (after considering the access fee revenue from Toll and the capital and operating expenditure to be incurred), the value of the Crown’s interest in the finance lease is nil.

1.17
A finance lease is defined by Statement of Standard Accounting Practice No. 18: Accounting for Leases and Hire Purchase Contracts (SSAP-18) as a lease that transfers substantially all the risks and rewards incident to ownership of an asset to the lessee. We have considered carefully the requirements of SSAP-18 and we are satisfied that the agreements entered into with Toll do not amount to a finance lease over the rail infrastructure.

1.18
Some of the factors that have contributed to our view that the agreements do not amount to a finance lease are:

  • The exposure of the Crown to funding unexpected and emergency expenditure, as occurred during 2004-05 in relation to the Nuhaka bridge failure and the Bay of Plenty floods.
  • The ability of Toll to walk away from some sections of the network through the “use it or lose it” clauses in the access agreement, in relation to both freight and passenger services.
  • The Crown’s decision-making powers in relation to maintenance and capital investment, including the ability to make additional investment on public policy grounds.
  • The term of the access agreement not being, in our view, for a major proportion of the useful life of the rail network taken as a whole, given the requirement in the access agreement to maintain the rail network “to standards and conditions equal to or better than those at the commencement date”.
  • The collectability of the minimum payments under the access agreement not being considered “reasonably predictable”, and being subject to further negotiations between the parties.
  • The inability to ascertain with reasonable certainty the amount of unreimbursable costs to be incurred by the Crown.
  • The difficulty of 2 different parties having a finance lease over the Auckland rail network, where there are access agreements with both Toll and the Auckland Regional Transport Authority (who have contracted with Connex to provide the Auckland passenger rail services).

1.19
On 31 August 2004, the rail infrastructure assets held by the Treasury were transferred to ONTRACK (New Zealand Railways Corporation). It is of note that the accounting treatment adopted by ONTRACK in its annual statutory financial statements is consistent with the views of this Office – that is, it has not accounted for the agreements as a finance lease; instead it has capitalised the replacement and upgrade expenditure on the national and Auckland rail networks. The Treasury has reversed ONTRACK’s accounting treatment as a consolidation adjustment in producing the 2005 Government financial statements.

1.20
In summary, we are of the view that the Treasury has incorrectly accounted for rail capital expenditure in the Government financial statements. This has resulted in an understatement of assets and an understatement of the Crown’s net surplus by approximately $91 million (less any related depreciation).

1.21
As well as capitalising future capital expenditure, we are of the view that more meaningful information would be provided in the Government financial statements if the rail infrastructure assets were revalued to their depreciated replacement cost. This would be consistent with the approach taken by the Crown to other major infrastructural assets, such as the state highway network. Determination of the depreciated replacement cost may also provide useful information for asset management of this major asset.

1.22
We understand that, after we completed the audit of the 2005 Government financial statements, the Treasury has reconsidered its position on this matter and does not intend to account for the rail agreements as a finance lease in future Government financial statements.

1.23
We have recommended that the Treasury continue to discuss the accounting treatment for rail infrastructure assets with our Office to ensure that these assets are appropriately accounted for in the 2006 Government financial statements.

Student loans valuation

1.24
Note 9 to the Government financial statements discloses the fair value for the student loan portfolio as $5,994 million. This is $471 million lower than the carrying value (after provisions) of $6,465 million. In the 2004 Government financial statements, the fair value of student loans was $261 million lower than the carrying value.

1.25
We agreed with the Treasury’s view that the carrying value of the student loan portfolio did not need to be written down to fair value at 30 June 2005. The reasons for our view are, first, that generally accepted accounting practice in New Zealand (NZ GAAP) is not clear as to the appropriate accounting treatment in these circumstances and, secondly, that the fair value determination remains, at this stage, only an approximation.

1.26
This is the third year that a fair value has been disclosed in the Government financial statements. The fair value exercise is highly complex, and requires collaboration between the Ministry of Education, the Inland Revenue Department, and the Ministry of Social Development. The fair value model contains a number of significant assumptions determined by actuaries based on their professional experience and the data available. Some of these assumptions will become more accurate as the loan scheme matures and further data is available.

1.27
NZ GAAP currently requires the disclosure of the fair value of financial assets such as the student loan scheme (subject to constraints of timeliness and cost), but NZ GAAP is not clear as to the accounting treatment to be adopted when the fair value disclosed is less than the carrying value of the assets.

1.28
Since we completed our audit, legislation has been passed2 to implement an interest-free student loan policy that will apply to new and existing loans (subject to some conditions about residency in New Zealand).

1.29
The removal of interest from student loans will significantly reduce the fair value of the student loan scheme. Because of this, we have agreed with the Treasury that it will be appropriate to write down the carrying value of the student loan scheme to its revised fair value, with effect from the date of passing of the legislation necessary to implement the new policy.

1.30
As the fair value calculation will become the basis on which the student loan scheme is recorded in the Crown’s statement of financial position, we expect the fair value determination to be appropriately robust. Given the complexity of the fair value calculation and its sensitivity to the key assumptions, we are of the view that an external peer review of the methodology used to determine the fair value would be beneficial.

1.31
We have therefore recommended that the methodology for determining the student loan fair value be subject to a peer review to ensure that the methodology and assumptions are appropriate, and in compliance with the requirements of authoritative financial reporting pronouncements (NZ IAS 39: Financial Instruments: Recognition and Measurement).

Fair value of other debtor portfolios

1.32
A number of Government departments are responsible for significant debtor portfolios (that is, assets of the Crown) where the debts are of such a nature that collection takes place over a significant period of time. Student loan debt is one example of this and, as discussed above, a fair value of the student loan portfolio has been determined and disclosed. There are, however, other significant debtor portfolios in the Government financial statements for which the fair value is not disclosed.

1.33
These include some debtor portfolios that have lengthy collection periods and do not accrue interest on outstanding balances. In these cases, the fair value is likely to be less than the carrying value of the debt. Examples of such debtor portfolios are:

  • Ministry of Social Development – $791 million gross Crown debt, including benefit overpayments, advances on benefits, and recoverable special needs grants ($396 million after provisions);
  • Ministry of Justice – $498 million gross outstanding court costs, fines, and enforcement fees ($382 million after provisions).

1.34
For some years, we have been recommending to the Treasury that fair value disclosures for these other debtor portfolios be included in the Government financial statements, and that the Treasury provide some guidance to departments on this matter.

1.35
On 9 September 2005, we were informed that fair values of the above debtor portfolios had been determined and would be disclosed in the 2005 Government financial statements. Our auditors for the Ministry of Social Development and the Ministry of Justice were requested to audit the fair values in a very limited timeframe.

1.36
Given the very limited time available, our auditors were not able to conclude whether the fair values for these 2 debtor portfolios were materially correct. We therefore requested the Treasury to remove these fair value disclosures from the 2005 Government financial statements.

1.37
As with student loans, our current expectation is that, under NZ IFRS (see paragraph 1.59), these debt portfolios will need to be initially recognised at fair value.

1.38
We have recommended that the Treasury provide guidance on determining fair values of debtor portfolios, to ensure that fair value disclosures are available for the 2006 Government financial statements and for the transition to NZ IFRS. We have also asked the Treasury to ensure that our auditors are involved at a sufficiently early stage in the process, so that the methodology can be agreed by all parties and the fair values audited in a realistic timeframe.

The Kyoto Protocol provision

1.39
New Zealand is a signatory to the Kyoto Protocol, which imposes binding emission reduction targets on New Zealand over the First Commitment Period (CP1) from 2008 to 2012. The Protocol came into force on 16 February 2005, when the required threshold of ratification was reached.

1.40
In June 2005, the Treasury informed us that it had an updated forecast net position for New Zealand under the Kyoto Protocol, and that it was of the view that a provision for this net position should be recognised in the June 2005 Government financial statements. The determination of the net position is an extremely complex process involving a number of models across a range of government departments. It was a significant challenge for us to complete the audit of the provision in the short period of time that was available before signing the audit opinion.

1.41
The current timing of the annual review of the Kyoto stocktake in May will cause ongoing challenges for this Office in gaining adequate audit assurance over the various drivers that make up the liability, within the timetable for the audit of the Government financial statements. We have therefore recommended that the Treasury, together with the other relevant government agencies, review the timetable for the annual Kyoto stocktake to ensure that sufficient time is available for robust audit assurance. We note that an earlier date for completion of the Kyoto stocktake may also be beneficial in providing an updated Kyoto position in time for the annual Government Budget.

1.42
The Crown has recognised a provision of $310 million in the 2005 Government financial statements for the Kyoto net position. The Crown’s net surplus for the year was therefore affected by $310 million. Detailed disclosure about the Kyoto Protocol provision is provided in Note 15 to the 2005 Government financial statements.

1.43
It should be noted that, although the provision is the Treasury’s best estimate at this time, provisions by their nature are more uncertain than most other items in the statement of financial position. It is likely that successive projections will change as more updated information becomes available, better systems are implemented, or some uncertainties are reduced. Some of the key aspects of the Kyoto provision which are subject to fluctuation through time include:

  • the price for each tonne of carbon;
  • the exchange rate with the US dollar; and
  • the various assumptions underlying the calculation of the emissions and sinks (for example, forecasts of Gross Domestic Product, energy prices, availability of more updated statistics).

1.44
Our audit work in relation to the Kyoto Protocol provision included reviewing models and assumptions, testing data where possible, and detailed discussions with various departments, peer reviewers, and independent experts. Overall, we are satisfied that the provision represented the Treasury’s best estimate of New Zealand’s liability as at 30 June 2005, and that it meets the criteria in Financial Reporting Standard No. 15: Provisions, Contingent Liabilities and Contingent Assets to be recognised as a provision.

1.45
As part of our audit assurance, we discussed the Kyoto Protocol provision with the independent experts from the United Kingdom that the Ministry for the Environment (MfE) engaged to review the determination of New Zealand’s net CP1 Kyoto position. These experts confirmed to us that they had identified no major concerns or issues with the methodologies used, and that the CP1 net forecast position is a reasonable best current estimate, given current information, understanding, and methodological tools.

1.46
Since signing our audit opinion, these experts have provided a draft report to the MfE that is consistent with their discussions with us. This report also makes a number of recommendations, and highlights areas where further improvements should be made.

1.47
We have recommended that the Treasury, together with the relevant agencies, continue to develop their methodologies, models, and data for determining emissions, sinks, and the net Kyoto position, and that these agencies address the recommendations in the recent international experts’ review report.

1.48
The Treasury has not recognised any provision or contingent liability for periods beyond 2012, because New Zealand currently has no specific obligations beyond CP1. The architecture of any obligations in future commitment periods has yet to be negotiated by the Kyoto signatories.

Financial Reporting Standard No. 37: Consolidating Investments in Subsidiaries

1.49
Financial Reporting Standard No. 37: Consolidating Investments in Subsidiaries (FRS-37) came into effect for the 2003 Government financial statements. A significant aspect of FRS-37 was a revised set of tests to determine which entities are controlled and hence subject to consolidation within the Government financial statements.

1.50
The application of the control test to the Crown is difficult, particularly in cases where legislation provides entities with a degree of statutory independence, such as tertiary education institutions (TEIs).

1.51
The accounting treatment adopted by the Treasury for the Government financial statements since 2003 has been not to consolidate TEIs on a line-by-line basis, but to equity account for them based on a 100% interest. The accounting treatment in the 2005 Government financial statements has remained unchanged from previous years.

1.52
This approach is based on a view that the control test is not satisfied, as the Crown does not have the ability to determine the financing and operating policies of TEIs, but that the Crown’s relationship with TEIs does meet the “significant influence” test necessary for equity accounting. As the Crown’s interest in the TEIs’ residual assets is 100%, the somewhat unusual accounting policy adopted is 100% equity accounting for TEIs. This approach and the reasons for it are set out in Note 13 to the Government financial statements.

1.53
In our view, line-by-line consolidation remains the treatment that best reflects the substance of the relationship between the Crown and the TEIs and the intent of FRS-37. However, we have accepted equity accounting for TEIs, as the treatment could arguably be regarded as complying with a strict interpretation of the mandatory elements within FRS-37, and because of the additional disclosures provided in Note 13, which enable readers to see the effect on the Government financial statements if a line-by-line treatment had been adopted for TEIs. With these additional disclosures, we have accepted that the Government financial statements are fairly stated.

1.54
This issue demonstrates the difficulty of the control test in the Crown context. The Treasury has communicated with the bodies responsible for setting Financial Reporting Standards in New Zealand to seek clarification of the control test in the Crown context. The Financial Reporting Standards Board issued a discussion paper on control of public benefit entities that have autonomy and independence in August 2005, but it is not yet clear when this issue will be finally resolved.

1.55
We have recommended that the Treasury continue discussions with standard setters on the application of the control test in the Crown context, to enable these issues to be resolved.

Tax revenue recognition

1.56
Direct income taxation revenue for the year to 30 June 2005 totalled $31,974 million. Our review of the accounting policies and their application in relation to taxation revenue identified 2 areas where the revenue recognition policies and processes in relation to provisional taxation payments should be reviewed to ensure that they remain appropriate:

  • Recognition point. Currently, provisional tax revenue is recognised at the earlier of the payment receipt date and the payment due date, rather than on a full accruals basis.
  • Provisional tax pooling. Since April 2003 taxpayers have been able to take advantage of provisional tax pooling accounts run through tax intermediaries to reduce exposure to use of money interest. The appropriateness of the accounting treatment for this is becoming more significant as the use of pooling accounts grows. The balance in the pooling accounts grew from $603 million at 30 June 2004 to $1,215 million at 30 June 2005.

1.57
Given the value of taxation revenue, any amendment to the tax revenue recognition policies has the potential to have a significant effect on the Crown’s financial performance, particularly in the year when the policy is changed.

1.58
We have recommended that the Treasury and the Inland Revenue department review the provisional tax revenue recognition policies (including the accounting treatment adopted for the pooling accounts), to ensure that they remain appropriate and in line with NZ GAAP.

Issues that affect future Government financial statements

Application of New Zealand equivalents to International Financial Reporting Standards

1.59
In August 2003, the Government announced that the New Zealand equivalents of International Financial Reporting Standards (NZ IFRS) will be implemented in the Government financial statements as part of the 2007 Budget. This means that the first audited Government financial statements under NZ IFRS will be for the year ending 30 June 2008 (with the comparative figures to 30 June 2007 restated in accordance with NZ IFRS).

1.60
Over the past year, we have had a number of discussions with Treasury officials about their planning for the transition to NZ IFRS. The Treasury has completed an initial impact assessment to identify the key areas of change, difficulty, or uncertainty. In addition, the Treasury has produced a draft set of Government accounting policies under NZ IFRS, which have been circulated for comment to entities within the Government reporting entity.

1.61
FRS-41: Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards encourages all entities to disclose in their annual report information about the entity’s planning for the transition to NZ IFRS, any key differences in accounting policies that are expected to arise on the adoption of NZ IFRS, and any known or reliably estimable information about the effects on the financial report had it been prepared using NZ IFRS.

1.62
Although compliance with FRS-41 was not mandatory for the 2005 Government financial statements, we were pleased that the Treasury chose to make disclosures about the transition to NZ IFRS (see page 19 of the 2005 Government financial statements). Given the limited level of impact assessment available at that time, the disclosures provided were necessarily at a fairly high level. The disclosures highlight that the biggest effects are expected in the area of financial instruments, including the need under NZ IFRS to initially recognise long-term receivables and advances that do not earn a market rate of return at fair value.

1.63
At this stage, we are satisfied with the progress made by the Treasury towards the transition to NZ IFRS, but there remains much work to be done.

1.64
We will continue to liaise closely with the Treasury on the implications of the change to NZ IFRS for the Government financial statements.

Public Finance Amendment Act 2004

1.65
The Public Finance Amendment Act 2004 (the PFAA) received assent on 21 December 2004. The PFAA changes the reporting entity from “the Crown” to the “Government reporting entity” from the year commencing 1 July 2005.

1.66
The Government reporting entity is defined to include the Sovereign and the legislative, executive, and judicial branches of the Government. The revised definition clarifies that all 3 branches of government are to be included within the Government financial statements. Section 27(3) of the amended Public Finance Act 1989 requires the annual financial statements of the Government to include the Government reporting entity’s interests in various entities, including Offices of Parliament. As a result, the Offices of Parliament will need to be re-incorporated into the 2006 Government financial statements.

1.67
One other change arising from the PFAA is that the Government financial statements will no longer have to disclose all guarantees and indemnities entered into by the Minister of Finance. However, those that meet the definition of a contingent liability under NZ GAAP will still need to be disclosed.

1.68
The Treasury will need to continue to plan to implement the changes required under the PFAA for the 2006 Government financial statements.

Related party transactions

1.69
Related party disclosures in the Government financial statements have historically been limited to aggregate information on salaries and allowances paid to Ministers of the Crown. With the change in reporting entity to the Government reporting entity from 1 July 2005, we consider it an opportunity to reconsider the issue of related party disclosures.

1.70
Statement of Standard Accounting Practice No. 22: Related Party Disclosures (SSAP-22) sets out the criteria for identifying related parties and states that related parties would normally include “those persons having authority and responsibility for planning, directing and controlling the activities of the reporting entity … and close members of the families of such individuals”.

1.71
We have given some preliminary consideration to the requirements of SSAP-22 in the context of the revised definition of the Government reporting entity (as set out in paragraph 1.66 above). In our view, related parties of the reporting entity include Ministers of the Crown, their close family members, and entities in which Ministers or their close family have a substantial interest or over which they are able to exercise significant influence. We also consider it possible that the Speaker of the House of Representatives and the Governor-General and their close family and interests would be related parties.

1.72
SSAP-22 also sets out the disclosure requirements for transactions with related parties. These disclosures are required for “material” related party transactions. In determining whether a transaction is material, it is necessary to consider both the amount and nature of the transaction. Although the above possible related parties will regularly transact with government entities (for example, paying postage, electricity, or car registration costs), we would not consider transactions of that nature to be material related party transactions.

1.73
The Register of Ministers’ Interests administered by the Cabinet Office provides information relevant to the identification of related parties but does not (and was not intended to) capture related party transaction information to comply with SSAP-22 requirements. In addition, a change to the Standing Orders of the House of Representatives established a Register of Pecuniary Interests of Members of Parliament that will also hold some relevant information (see Part 9).

1.74
If it is determined that there are additional related party transaction disclosures that should be provided to comply fully with SSAP-22, it may be considered more appropriate for public disclosure to be made via other reporting mechanisms that could be referred to in the Government financial statements.

1.75
We have recommended that the Treasury consider further the application of SSAP-22 to the Government financial statements, and whether present systems and processes are sufficient to identify all related party transactions.

Resolution of significant matters raised previously

Foreshore and seabed

1.76
Last year, we highlighted the proposals in the Foreshore and Seabed Bill and recommended that, if the Bill was passed, the Treasury consider whether, and if so at what value, the foreshore and seabed should be incorporated into the Government financial statements.

1.77
The Foreshore and Seabed Act 2004 (FSA) received assent on 24 November 2004. Section 13(1) of the FSA states –

On and from the commencement of this section, the full legal and beneficial ownership of the public foreshore and seabed is vested in the Crown, so that the public foreshore and seabed is held by the Crown as its absolute property.

1.78
We discussed at length with the Treasury the nature of the Crown’s interests in the foreshore and seabed, in order to determine whether the foreshore and seabed should be recognised as an asset or disclosed as a contingent asset in the Government financial statements. In the end, we agreed with the Treasury that no asset should be recognised and that detailed disclosure of the issue should be made in the notes to the 2005 Government financial statements. This disclosure (at page 77) included the following comment –

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.

Fair value of land and buildings

1.79
The Crown accounting policy is that land and buildings are recorded at fair value. The Treasury has provided guidance to entities that they are not required to revalue land and buildings with a book value of less than $50 million, on the grounds of materiality.

1.80
Last year, we noted that some entities, including Air New Zealand, had not revalued their land and buildings because the carrying value of the land and buildings at that date was slightly less than $50 million, despite these having a disclosed government valuation greater than $50 million (in Air New Zealand’s case, a valuation of $162 million).

1.81
We are pleased to report that, for the 2005 Government financial statements, Air New Zealand revalued its land and buildings to fair value in accordance with Crown accounting policies.

Ministry of Health – Consolidation of District Health Boards

1.82
The Ministry of Health is responsible for collecting, consolidating, and reporting to the Treasury the consolidated financial results of the District Health Boards (DHBs). For the past 3 years we have highlighted the problems we encountered in obtaining assurance over the accuracy of the consolidated results of the DHBs. A key issue has been the Ministry of Health’s inability to meet the agreed timeframes for producing the consolidated information.

1.83
We are pleased to report a significant improvement in the performance of the Ministry of Health in preparing the 2005 consolidated results of the DHBs, enabling the auditor of the Ministry of Health to complete the sub-consolidation audit within the agreed timeframe.

Ministry of Education – Consolidation of Tertiary Education Institutions

1.84
The Ministry of Education is responsible for collecting, aggregating, and reporting to the Treasury the aggregated financial results of the Tertiary Education Institutions (TEIs). Last year, we encountered issues with the timeliness of the TEI exercise by the Ministry of Education and with the timeliness of response by the Ministry of Education to our auditor’s queries. No such issues arose this year.

1: Sections 27(4) and 30 continued to apply for the year ended 30 June 2005, in accordance with the transitional provisions in Part 8 of the Public Finance Amendment Act 2004.

2: The Student Loan Scheme Amendment Act received royal assent on 21 December 2005.

page top