Note 1: Statement of accounting policies
Reporting entity
The Controller and Auditor-General is a corporation sole established by section 10(1) of the Public Audit Act 2001, and is an Office of Parliament for the purposes of the Public Finance Act 1989, and is domiciled in New Zealand.
The Controller and Auditor-General’s activities include work carried out by the Office of the Auditor-General (OAG) and Audit New Zealand (referred to collectively as “the Office”), and contracted audit service providers. The Office has designated itself as a public benefit entity for the purposes of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).
In addition, the Office has reported on trust money that it administers.
The financial statements of the Office are for the year ended 30 June 2008. The financial statements were authorised for issue by the Auditor-General on 30 September 2008.
Basis of preparation
The financial statements of the Controller and Auditor-General have been prepared in accordance with sections 45A, 45B, and 45F of the Public Finance Act 1989.
These financial statements have been prepared in accordance with New Zealand generally accepted accounting practice (NZ GAAP). They comply with NZ IFRS and other applicable Financial Reporting Standards, as appropriate for a public benefit entity.
This is the first set of financial statements prepared using NZ IFRS, and comparative figures for the year ended 30 June 2007 have been restated to NZ IFRS accordingly. Reconciliations of equity and net surplus/(deficit) for the year ended 30 June 2007 under NZ IFRS to the balances reported in the 30 June 2007 financial statements are detailed in Note 21.
The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in preparing an opening NZ IFRS statement of financial position as at 1 July 2006 for the purposes of the transition to NZ IFRS.
The financial statements have been prepared on a historical cost basis. The financial statements are presented in New Zealand dollars, and all values are rounded to the nearest thousand dollars ($000). The functional currency of the Office is New Zealand dollars.
Standards, amendments and interpretations issued that are not yet effective and have not been early adopted
Standards, amendments and interpretations issued but not yet effective that have not been early adopted, and which are relevant to the Office include:
NZ IAS 1: Presentation of Financial Statements (revised 2007) replaced NZ IAS 1: Presentation of Financial Statements (issued 2004) and is effective for reporting periods beginning on or after 1 January 2009. The revised standard requires information in financial statements to be aggregated on the basis of shared characteristics and to introduce a statement of comprehensive income. This will enable readers to analyse changes in equity resulting from transactions with the Crown in its capacity as “owner” separately from “non-owner” changes. The revised standard gives the Office the option of presenting items of income and expenditure and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). The Office expects to apply the revised standard for the first time for the year ending 30 June 2010, and is yet to decide whether it will prepare a single statement of comprehensive income or a separate income statement followed by a statement of comprehensive income.
Accounting policies
Income
Income is measured at the fair value of the consideration received.
Crown operating appropriations
Income is derived from the Crown for outputs provided to Parliament, from audit fees for the audit of public entities’ financial statements, and from other assurance work carried out by Audit New Zealand at the request of public entities.
Crown funding is recognised in the period to which it relates. Audit fees and other assurance income earned by the Office is recognised as the work progresses and time is allocated within work in progress to public entities.
Income of audit service providers
Audit fee income from audits carried out by contracted audit service providers is also recognised as the work progresses based on advice from the contracted audit service providers. Contracted audit service providers invoice and collect audit fees directly from public entities.
Interest
Interest income is recognised using the effective interest method.
Expenditure
Remuneration of the Auditor-General and the Deputy Auditor-General
The remuneration of the Auditor-General and the Deputy Auditor-General, which is a charge against a permanent appropriation in terms of clause 5 of Schedule 3 of the Public Audit Act 2001, is recognised as an expense of the Office.
Expenses of audit service providers
Fees paid to contracted audit service providers are recognised as the work progresses, based on advice from the contracted audit service providers. Contracted audit service providers invoice and collect audit fees directly from public entities.
Capital charge
The Office pays a capital charge to the Crown on its taxpayers’ funds as at 30 June and 31 December each year.
Leases
An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term. All leases entered into by the Office are operating leases.
Foreign currency transactions
Foreign currency transactions are translated into New Zealand dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognised in the Statement of financial performance.
Financial instruments
Financial assets and financial liabilities are initially measured at fair value plus transaction costs, unless they are carried at fair value through profit or loss, in which case the transaction costs are recognised in the Statement of financial performance.
Cash and cash equivalents
Cash includes cash on hand and highly liquid short-term deposits with banks.
Work in progress
Work in progress is stated at estimated realisable value, after providing for non-recoverable amounts.
Debtors and other receivables
Debtors and other receivables are initially measured at fair value and, where appropriate, subsequently measured at amortised cost using the effective interest rate, less impairment changes.
Impairment of a receivable is established when there is objective evidence that the Office will not be able to collect amounts due according to the original terms of the receivable. Significant financial difficulties of the debtor, probability that the debtor will enter into bankruptcy, and default in payments are considered indicators that the debt is impaired. The amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted using the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the Statement of financial performance. Overdue receivables that are renegotiated are reclassified as current (i.e. not past due).
Plant and equipment
Plant and equipment consists of furniture and fittings, office equipment, IT hardware, and motor vehicles. Plant and equipment is shown at cost, less accumulated depreciation and impairment losses.
Additions
Individual assets, or group of assets, are capitalised if their cost is greater than $1,000.
The cost of an item of plant and equipment is recognised as an asset if, and only if, it is probable that future economic benefits or service potential associated with the item will flow to the Office and the cost of the item can be measured reliably.
In most instances, an item of plant and equipment is recognised at its cost. Where an asset is acquired at no cost, or for a nominal cost, it is recognised at fair value as at the date of acquisition.
Disposals
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of the asset. Gains and losses on disposals are included in the Statement of financial performance.
Subsequent costs
Costs incurred subsequent to initial acquisition are capitalised only when it is probable that future economic benefits or service potential associated with the item will flow to the Office and the cost of the item can be measured reliably.
Depreciation
Depreciation is provided on a straight-line basis on all plant and equipment, at rates that will write off the cost (or valuation) of the assets to their estimated residual values over their useful lives. The useful lives and associated depreciation rates of major classes of assets have been estimated as follows:
| Furniture and fittings | 4 years (25%) |
| Office equipment | 2.5 - 5 years (20% - 40%) |
| IT hardware | 2.5 - 5 years (20% - 40%) |
| Motor vehicles | 3-4 years (25% - 33%). |
The residual value and useful life of an asset is reviewed, and adjusted if applicable, at each balance date.
Intangible assets
Software acquisition and development
Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Costs associated with maintaining computer software are recognised as an expense when incurred.
Costs that are directly associated with the development of software for internal use by the Office are recognised as an intangible asset. Direct costs include the software development and employee costs.
Staff training costs are recognised as an expense when incurred.
Amortisation
The carrying value of an intangible asset with a finite life is amortised on a straight-line basis over its useful life. Amortisation begins when the asset is available for use and ceases at the date that the asset is derecognised. The amortisation charge for each period is recognised in the Statement of financial performance.
The useful life and associated amortisation rate of computer software is estimated at between 2.5 and 5 years (20% - 40%).
Impairment of non-financial assets
Plant and equipment and intangible assets that have a finite useful life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable through either continued use or disposal. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.
An intangible asset that is not yet available for use at balance date is tested for impairment annually.
Value in use is depreciated replacement cost for an asset where the future economic benefits or service potential of the asset are not primarily dependent on the asset’s ability to generate net cash inflows and where the entity would, if deprived of the asset, replace its remaining future economic benefits or service potential.
If an asset’s carrying amount exceeds its recoverable amount, the asset is impaired and the carrying amount is written down to the recoverable amount. The impairment loss is recognised in the Statement of financial performance. Any reversal of an impairment loss is also recognised in the Statement of financial performance.
Creditors and other payables
Creditors and other payables are initially measured at fair value and, where appropriate, subsequently measured at amortised cost using the effective interest method.
Income in advance
Income in advance is recognised where invoiced audit fees exceed the value of time allocated within work in progress to public entities.
Employee entitlements
Short-term employee entitlements
Employee entitlements that the Office expects to be settled within 12 months of balance date are measured at nominal values based on accrued entitlements at current rates of pay.
These include salaries and wages accrued up to balance date, annual leave and time off in lieu earned but not yet taken at balance date, retiring and long service leave entitlements expected to be settled within 12 months, and sick leave.
The Office recognises a liability for sick leave to the extent that absences in the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated based on the unused sick leave entitlement that can be carried forward at balance date, to the extent that the Office anticipates it will be used by staff to cover those future absences.
The Office recognises a liability and an expense for bonuses where it is contractually obliged to pay them, or where there is a past practice that has created a constructive obligation.
Long-term employee entitlements
Entitlements that are payable beyond 12 months, such as long service leave and retiring leave have been calculated on an actuarial basis. The calculations are based on:
- likely future entitlements based on years of service, years to entitlement, the likelihood that staff will reach the point of entitlement and contractual entitlements information; and
- the present value of the estimated future cash flows. A weighted average discount rate of 5.75% and a salary inflation factor of 2.75% are used in the calculation of present value.
Superannuation schemes
Obligations for contributions to the Auditor-General’s retirement savings plan, Kiwisaver, and the Government Superannuation Fund are accounted for as defined contribution plans, and are recognised as an expense in the Statement of financial performance as incurred.
Taxpayers’ funds
Taxpayers’ funds is the Crown’s investment in the Office, and is measured as the difference between total assets and total liabilities.
Commitments
Expenses yet to be incurred on non-cancellable contracts that have been entered into on or before balance date are disclosed as commitments to the extent that there are equally unperformed obligations.
Cancellable commitments that have penalty or exit costs explicit in the agreement on exercising that option to cancel are included in the Statement of commitments at the value of that penalty or exit cost.
Goods and Services Tax
All items in the financial statements, including appropriation statements, are stated exclusive of Goods and Services Tax (GST), except for receivables and payables in the Statement of Financial Position, which are stated on a GST inclusive basis.
Where GST is not recoverable as input tax, it is recognised as part of the related asset or expense. The net amount of GST recoverable from, or payable to, the Inland Revenue Department (IRD) is included as part of receivables or payables in the Statement of financial position. The net GST paid to or received from the IRD, including the GST relating to investing and financing activities, is classified as an operating cash flow in the Statement of cash flows.
Commitments and contingencies are disclosed exclusive of GST.
Income tax
The Office is exempt from paying income tax in terms of section 43 of the Public Audit Act 2001. Accordingly, no charge for income tax has been provided for.
Main Estimates and Supplementary Estimates
The Main Estimates figures are those included in the Office’s Annual Plan for the year ended 30 June 2008. In addition, the financial statements also present updated figures from the Supplementary Estimates.
Output cost allocation
The Office has determined the cost of outputs using allocations as outlined below.
Direct costs are those costs directly attributable to a single output.
Direct costs that can readily be identified with a single output are assigned directly to the relevant output class. For example, the cost of audits carried out by contracted audit service providers is charged directly to output class: Provision of audit and assurance services.
Indirect costs are all other costs. These costs include: payroll costs; variable costs such as travel; and operating overheads such as property costs, depreciation, and capital charges.
Indirect costs are allocated according to the time charged to a particular activity.
There have been no changes in cost allocation policies since the date of the last audited financial statements.
Judgements and estimations
The preparation of these financial statements requires judgements, estimations, 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 assessment of work in progress value is the most significant area where such judgements, estimations, and assumptions are made.
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