Part 1: Matters arising from the audit of the 2007/08 financial statements of the Government

Central government: Results of the 2007/08 audits.

1.1
The Auditor-General issued the audit report on the Financial Statements of the Government of New Zealand for the Year Ended 30 June 2008 (the financial statements) on 30 September 2008.

1.2
The audit report appears on pages 20-21 of the financial statements. The audit report includes our unqualified opinion that those statements:

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

1.3
As in previous years, the Treasury has commented comprehensively on the financial statements. These comments are presented on pages 4-18 of the financial statements.

Significant matters arising from the 2007/08 audit

1.4
In this Part, we discuss some significant matters that arose during the 2007/08 audit of the financial statements:

Transition to New Zealand equivalents to International Financial Reporting Standards

1.5
The 2008 financial statements are the first to have been prepared in compliance with NZ IFRS. Producing financial statements that comply with NZ IFRS has been an extremely complex and challenging task. It required a huge effort over a number of years by the Treasury’s Fiscal Reporting team, the finance teams in the many entities that have their data consolidated into the financial statements, and our auditors. We congratulate those involved for achieving this substantial task on time and with an unqualified audit report.

1.6
The transition to NZ IFRS − driven by the requirements of NZ IFRS 1: First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards − has been lengthy and complex. The Government Reporting Entity (and the many entities within it) had to prepare an opening balance sheet at 1 July 2006 that complied with NZ IFRS. It also had to restate its comparative information for the year ended 30 June 2007 under NZ IFRS.

1.7
We completed the audits of the opening balance sheet and the restated comparative information. This information was correctly incorporated into the 2008 financial statements, as required by NZ IFRS 1.

Consolidation processes

1.8
The transition to NZ IFRS has required the Treasury to remap its Crown Financial Information Systems (CFIS). The Treasury also had to prepare consolidation journals to work with the new NZ IFRS reporting pack and accounting policies. This has been a substantial piece of work for the Treasury.

1.9
The Fiscal Reporting team has put much time and effort into improving the documentation of the consolidation process. This included creating an eliminations framework under NZ IFRS and defining the purpose of each consolidation journal in the system. The documentation is now comprehensive and thorough.

1.10
The Treasury’s work has allowed us to gain a good understanding of the new CFIS system. Therefore, we were able to complete our consolidation audit efficiently.

NZ IFRS accounting policies – sovereign receivables

1.11
The Treasury initially set the accounting policies that comply with NZ IFRS for the financial statements in 2006. It then communicated the policies to all entities within the Government Reporting Entity. Those entities used the policies to prepare the NZ IFRS-compliant opening balance sheet and restated comparative information.

1.12
Significant issues arose in applying the policies to the valuation of the Crown’s non-commercial debt portfolios, particularly for tax receivables, benefit recoveries, and fines debt.

1.13
The figures for tax receivables, benefit recoveries, and fines debt in the opening balance sheet were based on the Treasury’s initial NZ IFRS accounting policy. This policy was to account for all such receivables as “loans and receivables” under the New Zealand equivalent to International Accounting Standard (NZ IAS) 39: Financial Instruments: Recognition and Measurement. This required the receivable to be initially recognised at fair value and then measured at amortised cost.

1.14
It became clear that there were practical difficulties in trying to apply the policy based on NZ IAS 39 to tax receivables for the purposes of the restated comparative year. In May 2008, the Treasury proposed a change to the NZ IFRS accounting policies for the financial statements that established a new category of asset called “sovereign receivables”. These are receivables that arise out of the use of the Crown’s sovereign power rather than out of contracts. Under the changed policy, the accounting policy for tax receivables is now:

Tax receivables are recognised initially at the amount of tax owed, subsequently adjusted for penalties and interest as they are charged, and tested for impairment.

1.15
In our view, this is an appropriate response given the limitations of NZ IFRS in the context of public benefit entities. It is also a simpler policy for the Inland Revenue Department (IRD) and other entities to apply to their complex debt portfolios.

Therefore, we have accepted the changed policy because non-contractual receivables are specifically scoped out of NZ IAS 39. The revised policy provides more meaningful reporting in the financial statements.

Effect of transition to NZ IFRS

1.16
Note 33 to the financial statements provides information on the effect of the transition to NZ IFRS. Overall, the transition increased the Crown’s reported net worth by $1,961 million at 1 July 2006 and $991 million at 30 June 2007. The Crown’s operating balance for the year ended 30 June 2007 reduced by $641 million when restated under NZ IFRS. We are satisfied that the 2008 financial statements appropriately reflect the effects of the transition to NZ IFRS.

1.17
The major effects on the statement of financial position from the change to NZ IFRS are:

  • Under NZ IFRS, the assets and liabilities of the Government Superannuation Fund (GSF) are not consolidated line by line in the financial statements. Instead, the GSF has been accounted for as a net retirement plan liability. The net retirement plan liability for the GSF on transition to NZ IFRS decreased by $3,133 million at 1 July 2006 and by $3,234 million at 30 June 2007. This change arose from eliminating the liability for future tax that will be payable (primarily to the Crown) on future investment tax income because of the use of a pre-tax rather than post-tax discount rate.
  • The claims liability of the Accident Compensation Corporation (ACC) has increased. NZ IFRS requires an additional risk premium and a liability adequacy test on the unearned levy liability to meet estimated future claims. The actuarially calculated liability before adopting NZ IFRS represented the expected outflows for the claims (a mid-point estimate with an equal chance of actual payouts being greater or less than the central estimate). NZ IFRS 4: Insurance Contracts requires a risk margin to be added to the central estimate to reflect the inherent uncertainty in the central estimate. The risk margin has been calculated at a 75% probability of adequacy. After the transition to NZ IFRS, ACC’s claims liability increased by $1,603 million at 1 July 2006 and by $1,976 million at 30 June 2007.
  • NZ IFRS requires all derivative financial instruments (such as interest rate swaps and forward foreign exchange contracts) to be recognised in the statement of financial position at their fair value. Recognising derivatives at fair value has increased the Crown’s net worth by $304 million at 1 July 2006 but decreased the Crown’s net worth by $386 million at 30 June 2007.
  • Under NZ IFRS, the Crown’s receivables portfolios (such as tax debt, fines debt, and benefit recoveries) have been remeasured. NZ IFRS requires the time value of money and collection costs to be taken into account. This resulted in a decrease in receivables carrying values of $369 million at 1 July 2006 and $481 million at 30 June 2007.
  • In addition, many items within the Crown’s statement of financial position have been reclassified. This is a result of specific classifications that are required under NZ IFRS and the clearer classification criteria that the Treasury set out in its instructions to entities within the Government Reporting Entity.

1.18
The major effects on the statement of financial performance from the change to NZ IFRS are:

  • The change in the risk premium for ACC’s claims liability from one reporting date to the next has affected the statement of financial performance. This resulted in a decrease in the operating balance for the year ended 30 June 2007 of $373 million.
  • The change in fair value of derivative financial instruments (to the extent they are not hedge accounted) has affected the statement of financial performance. This resulted in a decrease in the operating balance for the year ended 30 June 2007 of $226 million.
  • The changes in accounting for receivables under NZ IFRS resulted in a decrease in the operating balance for the year ended 30 June 2007 of $202 million.
  • Under NZ IFRS, goodwill is not amortised but rather tested annually for impairment. This resulted in the previous amortisation charge of $98 million (primarily for goodwill on Air New Zealand) for the year ended 30 June 2007 being written back.

1.19
One other major effect of the transition to NZ IFRS has been the substantial increase in the volume of disclosures required, particularly for financial instruments. This is demonstrated by the significant increase in the number of pages in the published financial statements. In a number of areas, the increased disclosure provides potentially useful information to the reader (for example, sensitivity analysis of key assumptions or market risks for financial instruments). In other areas, it is less clear whether the benefits to readers outweigh the costs of collecting and reporting the information.

1.20
The focus for the 2008 financial statements has, to a significant extent, been on meeting the requirements of NZ IFRS. We have recommended that, during 2008/09, the disclosures in the financial statements be further reviewed to identify any that are not material and that do not convey information potentially important to a reader.

Treasury and sector performance

1.21
Under section 30(1) of the Public Finance Act 1989, the Treasury is required to provide the financial statements to the Auditor-General by the end of August of each year. This year, the Treasury provided the financial statements by the end of August, which is a notable achievement in the first year of applying NZ IFRS.

1.22
We reported at the end of our 2006/07 audit that we were concerned about the performance of some entities in providing financial information to the Treasury for consolidation into the financial statements. We also highlighted our concerns about the capacity of, and capability in, the finance functions of some central government agencies to deal with some of the complex issues arising under NZ IFRS.

1.23
Our concerns about the performance and capability of some agencies remain. However, we were pleased with the Treasury’s response to our concerns. It is working with relevant agencies on these issues. It is also proactively monitoring and managing the reporting of entities of significance to the financial statements where there have been concerns about the timeliness or accuracy of reporting.

1.24
Despite the Treasury’s additional work, a number of entities provided information late or with material errors, or had long delays in achieving audit clearance on their consolidation information for the 2008 financial statements.

1.25
We have encouraged the Treasury to continue to closely monitor the reporting performance of entities and to work with chief executives where necessary.

Valuation of the student loan scheme

1.26
Student loans are recognised in the 2008 financial statements at a carrying value of $6,741 million ($6,011 million in 2007). Note 17 to the financial statements provides detailed disclosures about student loans.

1.27
The student loans carrying value and fair value (which is used for disclosure purposes only) are generated using complex actuarial models. The actuary created these models on behalf of the three departments that are jointly responsible for administering student loans. These departments are:

  • the Ministry of Education, which provides policy advice and tertiary education data for the valuation models, and manages the contract with the actuary;
  • the Ministry of Social Development (MSD), which assesses applications, makes student loan payments, and provides information on borrowing for the models; and
  • IRD, which manages the collection of loan repayments and provides data on loan repayments and balances for the models.

1.28
The responsibility for accounting for student loans is split between the MSD and IRD. MSD accounts for all new borrowings and then transfers these to IRD in February each year. This means that, as at 30 June every year, both MSD and IRD have student loan balances to account for. The institutional arrangements for administering student loans add more complexity to our audit.

1.29
Significant issues arose in the audit of the student loans balance during our 2006/07 audit. The receivable valuation of student loans is complex. Therefore, in an attempt to avoid similar issues in future years, we recommended in our report about the 2006/07 audit that:

  • another actuary carry out a quality assurance review of the actuarial models and valuations each year, because of the complexity of the models and the significant effect of changes in actuarial assumptions on the values; and
  • the Treasury and the three departments jointly responsible for administering student loans review the timing of the actuarial valuation processes that determine the student loans carrying values and fair values. We noted that completing the valuations before 30 June each year and then rolling forward to the end of the financial year may provide more time to resolve any complex issues that may arise in the valuation process.

1.30
This year, the timetable for the student loans valuation was brought forward by a few weeks. However, the timetable for the valuation and audit remains very tight, with little room for delays. We remain of the view that aspects of the valuation could be completed earlier.

1.31
The Treasury and IRD did not accept our 2007 recommendation that the model be reviewed independently. Therefore, our own expert actuary performed a quality assurance review of the key assumptions used by the actuary who carried out the valuation. This review identified some errors and areas of concern in the valuation. The most significant issue that our expert actuary identified was about the adequacy of the risk premium used in the valuation. This was adjusted in the final valuation.

1.32
We remain of the view that the actuarial model should be independently reviewed.

1.33
The actuarial model also determines a fair value to meet the fair value disclosure requirements of NZ IFRS 7: Financial Instruments: Disclosures. As at 30 June 2008, the fair value of student loans was determined to be $5,521 million, which is $1,220 million lower than the carrying value ($568 million lower at 30 June 2007).

1.34
We discussed the difference between the carrying value and the fair value with the Treasury, IRD, and IRD’s appointed actuary. They attributed most of the difference to the change in the discount rate that was used in the calculation of fair value, predominantly because of an increase in the risk premium.

1.35
Our consideration of the reasons for the increasing difference between carrying and fair values was hampered by an error in the discount rate information in the draft financial statements.

1.36
These matters have again raised our concerns about the robustness of the quality assurance processes for reporting on student loans. To address these concerns, we recommended that:

  • the Treasury and IRD review their quality assurance processes for reporting on student loans in the financial statements;
  • the actuary annually complete a roll-forward of the fair value of student loans, showing the components causing the change (new borrowing, initial fair value write down, repayments, impairments, discount unwind, discount rate changes) and supporting the disclosed fair value; and
  • the actuary be asked to document each year the reasons for the cumulative difference between the carrying value and fair value.

Tax revenue recognition for structured finance transactions

1.37
Terminal taxation revenue is normally recognised in the financial statements at the time that assessments are raised. However, revenue has not been recognised for tax assessments of $1,589 million for “structured finance” transactions (predominantly in the banking industry) because the amount of revenue that may arise cannot be reliably measured at this stage.

1.38
The range of factors that cause this fundamental uncertainty include:

  • there being no legal precedent;
  • these being New Zealand’s largest tax cases; and
  • the technical nature of the disputes.

1.39
One of these cases is currently before the courts. However, given the complexity of the cases and the sums of money involved, it is likely to be some years before the final amount of tax owing is known with any certainty.

1.40
Since these transactions occurred, income tax legislation has been amended to limit the extent to which foreign-owned banks can debt fund their operations and deduct interest from their assessable income.

1.41
Note 31 to the financial statements includes the following unquantifiable contingent asset disclosure for these transactions:

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.

1.42
We accepted this accounting treatment in the 2008 financial statements because of the level of uncertainty about the amount of any revenue that will eventually arise.

1.43
We recommended that the Treasury and IRD continue to monitor progress in resolving these cases and ensure that the circumstances of these transactions are appropriately assessed each time budgets and financial statements are prepared.

Tax pooling

1.44
Tax pooling was introduced on 1 April 2003 to allow taxpayers to manage provisional tax payment risk by reducing interest on underpaid tax and increasing interest on overpaid tax.

1.45
More taxpayers are using the tax pooling account for provisional tax payments. Therefore, the tax pool has continued to increase to $3.3 billion as at 30 June 2008 ($2.8 billion in 2007). A number of financial institutions have paid amounts into the tax pooling account for tax in dispute in earlier periods.

1.46
Provisional tax revenue is initially recognised based on the provisional tax assessment that is adjusted according to the due dates for payments. If no provisional tax assessment has been made, revenue is recognised based on payments recognised against the taxpayer’s account. However, the financial statements do not recognise payments into the tax pooling accounts as provisional tax revenue. Rather, these amounts are treated as tax paid in advance. Therefore, revenue recognition is delayed if provisional tax payments are made through a pooling account. It also causes problems for accurately forecasting tax revenue.

1.47
We have accepted this accounting treatment to date because:

  • IRD has not yet determined a practical and reliable solution to accounting for revenue paid into tax pools (in part because of the limited information available to the IRD about the reasons for the payments); and
  • IRD has reviewed the largest balances in the tax pools at the end of the financial year to determine whether there is enough support for revenue recognition.

1.48
IRD and the Treasury have recognised the issues caused by tax pooling for taxation revenue recognition and forecasting. They are taking steps to improve information flows for tax pooling. These steps should help predict the amount and timing of tax assessments and revenue recognition from tax pooling taxpayers. However, some deferral of revenue recognition and risks to the accuracy of tax forecasts caused by tax pooling will continue.

1.49
We recommended that IRD continue to analyse, at the end of the financial year, overly large balances in tax pools, with appropriate monitoring from the Treasury. This will ensure that revenue recognition at the end of the financial year continues to be materially correct.

State highway valuation

1.50
In the 2008 financial statements, the state highway network is valued at $20.9 billion. By value, it is the largest physical asset on the Crown’s balance sheet. Note 20 of the financial statements contains detailed information about the state highway valuation.

1.51
During our audit of the state highway valuation, we encountered a number of significant issues that resulted in delays to achieving audit clearance.

Quality assurance processes

1.52
We are concerned that the draft state highway valuation provided to our auditors contained a number of significant errors. This resulted in material adjustments being proposed to the valuation. We expected the New Zealand Transport Agency (NZTA, formerly Transit New Zealand) or the quality assurance and checking processes of the independent valuer to have picked up and corrected these errors.

1.53
We recommended that, in future, the state highway valuation be subject to more appropriate levels of quality assurance by both the valuers and by NZTA’s management before it is submitted to us for audit.

Valuation methodology – rolling valuations

1.54
The current methodology for state highway valuation provides for the annual valuation to be carried out on a rolling basis. A full valuation is carried out for three of the roading regions each year. An independent valuer updates the valuations of the remaining 11 roading regions by using index information. The resulting valuation is supported by an overall sign-off by the independent valuer, who confirms that the annual valuation complies with financial reporting and valuation standards.

1.55
In 2008, full valuations were completed for the Otago, Taranaki, and Wanganui regions, but did not cover the Auckland or other major (by value) state highway regions. We were concerned about the limited coverage of the regions that were fully valued. We were also concerned that the movements in the valuations of the three regions were very significant. These movements caused us to question how appropriate the assumptions in the valuation methodology were for the 11 regions that were not fully valued.

1.56
We discussed our concerns about the validity of the assumptions in the valuation methodology with NZTA’s management and the independent valuer. We were satisfied with the outcome of those discussions for the purpose of the 2008 valuation. NZTA has also started a project to review the assumptions.

1.57
We recommended that NZTA consider whether to carry out a full valuation of the whole state highway network in 2008/09. A full valuation of the entire state highway network would provide a robust basis for the annual valuations in future years.

Valuation methodology – future developments

1.58
Before the 2008 state highway valuation, NZTA’s independent valuer reviewed the costs of three large state highway construction projects. The review compared actual project costs with the costs used to value the state highway network. The aim of the review was to identify and quantify areas of significant difference and to determine whether changes to the current valuation are warranted.

1.59
The current valuation uses average unit costs. The valuer has expressed concerns that these may not be appropriate for some high-value urban projects. The valuer proposed to introduce “brownfield” factors into the valuation for 2008 to better differentiate the cost of construction in congested/high-value locations from those at “greenfield”/low-value sites.

1.60
As a result of the review of actual project costs, the valuer suggested that the valuation include an interim brownfield allowance. The valuer suggested rates of 5% for rural projects and 25% for urban/motorway projects. This would cover:

  • traffic management;
  • environmental compliance;
  • utilities;
  • generic increases in construction costs because of the restrictions imposed by the built environment; and
  • the significant costs associated with re-establishing the interface with adjacent properties.

1.61
Because this review was only based on three projects in which the actual rates varied significantly, we considered that there was not enough evidence to support applying these higher rates in the 2008 valuation. The valuer and NZTA have accepted our view and have represented that the 2008 carrying value of the network (based on the current methodology and assumptions) is materially correct.

1.62
We recommended that NZTA continue to review large projects in the next 12 months with the independent valuer. These reviews are necessary to obtain further evidence to determine whether the potential adjustments to rates are appropriate.

The Kyoto Protocol provision

1.63
New Zealand is a signatory to the Kyoto Protocol, which imposes binding emission reduction targets on New Zealand during the First Commitment Period (CP1) from 2008 to 2012.

1.64
A provision for New Zealand’s net deficit position under the Kyoto Protocol for CP1 was first recognised in the 2005 financial statements. This year, a provision of $562 million ($704 million in 2007) has been recognised. Note 26 to the financial statements provides a detailed disclosure about the Kyoto Protocol provision. The Treasury has not recognised any provision or contingent liability for periods beyond 2012 because New Zealand currently has no specific obligations beyond CP1.

1.65
The net obligation at 30 June 2008 is based on a deficit of 21.7 million tonnes of carbon (45.5 million tonnes in 2007). This is measured using a carbon price of EUR 12.50 per unit (EUR 8.86 per unit in 2007) and an exchange rate of EUR 0.4829 = $NZ1 (EUR 0.5726 = $NZ1 in 2007).

1.66
The reduction in the projected deficit of Kyoto Protocol of 23.8 million tonnes is explained in the Net Position Report 2008 (published by the Ministry for the Environment). Emissions are expected to reduce because:

  • transport sector emissions are projected to be lower than in 2007 because of lower than projected fuel use and higher fuel prices;
  • agriculture emissions are projected to be lower because of the effects of a drought in early 2008 and a continuing decline in sheep numbers;
  • the rate of deforestation is projected to be lower than in 2007 mainly because of the implementation of the Emissions Trading Scheme (ETS); and
  • there will be an increase in the estimate of carbon removals after implementing recommendations made by an external expert (AEA Technology) who reviewed the methodology.

1.67
The Kyoto Protocol provision is the Treasury’s best estimate of the likely obligations under the protocol. This best estimate has taken into account the effects of the proposed ETS. The ETS has already affected the forestry sector’s intentions and activities, particularly deforestation. The ETS is backdated to 1 January 2008 for the forestry sector. Since balance date, Parliament has passed the Climate Change (Emissions Trading and Renewable Preference) Bill, which will establish the ETS.

1.68
Although the provision is Treasury’s best estimate at this time, provisions by their nature are more uncertain than most other items in the statement of financial position. Estimates are likely to change as more updated information becomes available, better systems are implemented, and some uncertainties are reduced. Some of the main aspects of the Kyoto Protocol provision that are likely to fluctuate include:

  • the price for each tonne of carbon;
  • the exchange rate with the Euro; and
  • the various assumptions for calculating emissions and sinks (for example, forecasts of Gross Domestic Product, oil prices, availability of updated statistics, and the effect of the ETS).

1.69
An independent expert last reviewed the assumptions and methodology underlying the projections of the net Kyoto position in 2007. We recommended that the assumptions and methodology underlying the projections be reviewed again during 2008/09.

Discount rates applied to significant liabilities

1.70
The operating balance and net worth of the financial statements are significantly affected by changes in discount rates applied to key liabilities. These liabilities include:

  • insurance liabilities – primarily ACC claims ($20,374 million in 2008), which are accounted for under NZ IFRS 4: Insurance Contracts; and
  • retirement plan liabilities (net of plan assets) – primarily GSF ($8,257 million in 2008), which are accounted for under NZ IAS 19: Employee Benefits.

1.71
The liability for these portfolios is valued each year using actuarial valuation models, based on a number of key assumptions for the individual portfolio characteristics. A major assumption in measuring the liabilities is the discount rate used in the valuation model.

1.72
Notes 24 and 25 to the financial statements provide comprehensive note disclosures for these liabilities, including key assumptions and their sensitivities. This sensitivity analysis is important given the sensitivity of the valuation models to a movement in discount rates. For example, for the year ended 30 June 2008, if the discount rate was to reduce by 1%, the sensitivity analysis shows an increase in the ACC liability of $2,095 million and an increase in the GSF liability of $1,371 million. This would have a corresponding effect on the operating balance.

1.73
ACC and GSF determined the discount rates applied to the ACC liability (6.63% for the following year) and GSF liability (6.95% for the following year) respectively. The small variation between the two can be supported by the slightly different requirements of NZ IFRS 4 (risk-free discount rates based on current observable objective rates that relate to the nature, structure, and term of the future obligations) and NZ IAS 19 (market yields on government bonds where the currency and term of the bonds is consistent with the currency and estimated term of the employee benefit obligations).

1.74
Note 26 to the financial statements also quotes a discount rate of 5.5%. This rate has been applied to provisions for employee entitlements that accrue over a period of time (such as long-service leave). The disclosed rate is not consistent with the requirements of NZ IAS 19 and is based on guidance the Treasury gave to the sector some years ago. In practice, much of the sector is using rates broadly comparable with the requirements of NZ IAS 19 rather than the disclosed rate.

1.75
Before completing our audit of the financial statements, we queried this disclosure with the Treasury. We accepted the decision not to amend it on the basis of materiality to the financial statements.

1.76
We recommended that the Treasury update its guidance to central government agencies on appropriate discount rates for employee entitlement provisions. In addition, given the sensitivity of the financial statements to the discount rates used by ACC and GSF, we recommended that the Treasury closely monitor the discount rates proposed for liability valuations by ACC and GSF. We recommended that the Treasury confirm that the rates are appropriate and that differences between the two rates are supportable.

Transactions with related parties

1.77
Related party disclosures in the financial statements have historically been limited to aggregate information on salaries and allowances paid to Ministers of the Crown. We previously recommended that the Treasury consider how accounting standards on related parties are applied to the financial statements. In our report about the 2005/06 audit of the financial statements, we recommended that this issue be reconsidered when the requirements under NZ IFRS were known.

1.78
Under NZ IAS 24: Related Party Disclosures, one category of related parties are “key management personnel”, defined as “those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity”. In the context of the Government Reporting Entity, the Treasury has determined that the key management personnel are the Ministers of the Crown who are members of Cabinet. We agree with this assessment.

1.79
Note 7 to the financial statements provides the required disclosure of key management personnel compensation. In addition, the following narrative disclosure is provided:

The Cabinet Manual sets out guidance in respect of Ministers’ conduct, public duty, and personal interests. Ministers are responsible for ensuring 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.

1.80
The intent of this disclosure is to satisfy the requirement of NZ IAS 24 to provide disclosures of any transactions that might have occurred between the Government Reporting Entity and:

  • key management personnel;
  • close family members of key management personnel; or
  • entities controlled, jointly controlled, or significantly influenced by members of key management personnel or their close family members.

1.81
Although we are not aware of any significant transactions that would require disclosure, there are currently no mechanisms in place to collect information on any such transactions. Information on Ministers’ interests is recorded in the Register of Pecuniary Interests. However, this does not include information on family members and their interests. Further, there are no mechanisms to collect information about any transactions between these interests and entities within the Government Reporting Entity.

1.82
We recommended that the Treasury consider further how the information to support related party disclosures that comply with NZ IAS 24 (or to confirm that there are no transactions that need to be disclosed) could be collected.

Acquisition of Toll NZ Limited

1.83
On 1 July 2008, the Crown purchased 100% of the shares of Toll NZ Limited (since renamed KiwiRail Holdings Limited) for $690 million. Before the acquisition, assets and operations that are not integral to the rail operation were transferred out of the company.

1.84
The Treasury has provided us with legal advice confirming that the transaction occurred on 1 July 2008. Therefore, the transaction does not affect the 2008 financial statements, other than being disclosed as a post-balance date event in Note 34 to the financial statements.

1.85
Therefore, the accounting for the transaction will need to be reflected in the 2009 financial statements. This will require determining the fair values of the acquired assets and the assumed liabilities.

1.86
We are aware that, in the financial statements for the three months to September 2008, a provisional unaudited assessment of the net fair value of assets and liabilities of $448 million has been disclosed. We will liaise with the Treasury and KiwiRail Holdings Limited in the coming months to confirm the valuations and accounting treatment.

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