Part 1: Matters arising from auditing the 2008/09 financial statements of the Government

Central government: Results of the 2008/09 audits.

1.1
In this Part, we report the results of our audit of the Financial Statements of the Government of New Zealand for the year ended 30 June 2009 (the Government's financial statements) and discuss the significant matters arising from the audit.

Audit opinion

1.2
The Deputy Auditor-General issued the audit report on the Government's financial statements on 30 September 2009.

1.3
The audit report appears on pages 22 and 23 of the statements. The audit report includes our unqualified audit 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 2009; and
    • the results of the Government's operations and cashflows for the year ended 30 June 2009.

Summary of significant matters arising from the 2008/09 audit

1.4
The following is a summary of the significant matters arising from the audit. We discuss them in more detail in the rest of this Part:

  • The Treasury managed the process for preparing the Government's financial statements well. We were pleased with an improvement in public entities' reporting accurately and on time, given concerns we have raised previously. Nevertheless, further improvements can be made. We have recommended that the Treasury continue to closely monitor public entities' reporting performance. (See paragraphs 1.5–1.8.)
  • Information reported to the Treasury in August 2009 on the long-term insurance and retirement plan liabilities for the Government's financial statements at 30 June 2009 showed a significant difference between the long-term discount rates used to value those liabilities. The difference raised concerns that there may be a material misstatement in the liabilities. The Treasury investigated the difference and, as a short-term solution, directed the Government Actuary to use a particular discount rate to value the retirement plan liabilities at 30 June 2009. After carrying out a lot of extra audit work, we concluded that the discount rates used were acceptable. However, we believe that the issue should have been identified earlier. We had recommended after our 2007/08 audit that the Treasury closely monitor discount rates, given the sensitivity of the liability valuations to changes in rates. Closer monitoring would have identified the significant difference in long-term discount rates earlier and may have enabled a long-term solution to the issue to be found. Inefficiencies in audit time and costs may also have been avoided. We have recommended that the Treasury work with the actuaries involved in valuing the liabilities during 2009/10 to agree a consistent approach to discount rate assumptions in future. (See paragraphs 1.9–1.27.)
  • A provision has been recognised at 30 June 2009 for future payments under the Retail Deposit Guarantee Scheme introduced in October 2008. We are satisfied that the provision is based on reasonable assumptions. However, we note that there are a wide range of outcomes possible under the scheme. The approach to the provisioning to date has been high level and should be tested with a fuller analysis for each institution. We have recommended that the Treasury carry out a fuller analysis of non-bank financial institutions that are part of the Retail Deposit Guarantee Scheme and allocate responsibility for the integrity of the financial information and financial controls over provisioning calculations. (See paragraphs 1.28–1.36.)
  • Taxation revenue of $1.423 billion arising from banks' structured finance transactions was recognised in 2008/09 following the outcome of the first High Court case against the Bank of New Zealand, which found in favour of the Commissioner of Inland Revenue, and based on subsequent legal advice. On 23 December 2009, the Commissioner and the respective banks reached settlement agreements under which the banks will pay 80% of the tax in dispute ($1.2 billion). Interest will also be due, but the final figure can only be determined after new assessments are made, statements of account issued, and transfers made from tax pools. We understand that, under the settlement agreements, the Commissioner will not impose any shortfall penalties. (See paragraphs 1.37–1.42.)
  • We are pleased that issues we raised in previous years' audits about recognising taxation revenue have been acted on. However, there are areas of revenue recognition where further consideration is needed, including income tax refunds. We have recommended that the Treasury support Inland Revenue in its review of policies for recognising taxation revenue, which is to start in 2009/10. (See paragraphs 1.43–1.47.)
  • Recommendations we made last year to improve the valuation of state highways have been implemented, with one exception. The valuer had expressed concerns that the average unit costs may not be appropriate for high-value urban projects and could result in an undervaluation of the network. We have recommended that the Treasury work with the New Zealand Transport Agency to review the approach to valuing the state highway network, particularly for the costs associated with congested/high-value urban projects. (See paragraphs 1.48–1.53.)
  • A recommendation we made last year to independently review the methodology and assumptions for the Kyoto Protocol projected net position during 2008/09 has not yet been implemented. Regular independent reviews are important, given that the projection, by its nature, is subject to a lot of uncertainty. We have recommended that the Treasury work with the Ministry for the Environment to ensure that an independent review is carried out during 2009/10. We understand that an external review has recently been carried out. (See paragraphs 1.54–1.63.)

Significant matters arising from the 2008/09 audit

The Treasury and public entity performance

1.5
The Treasury proactively managed the consolidation reporting by significant public entities in 2008/09 and prepared the Government's draft financial statements to a good standard by the statutory deadline. Treasury staff provided significant support and information to the audit team, including keeping clear and detailed work papers and having an audit file available for our audit team on the first day of our final audit visit.

1.6
In recent years, we have raised significant concerns about the performance of some public entities in preparing timely and accurate financial information for consolidation. We were pleased to see an improvement in public entities' performance this year. However, further improvements can still be made. We have encouraged the Treasury to continue closely monitoring the reporting performance of entities and, where necessary, to involve the relevant chief executives.

1.7
This year, we received all of the expected consolidation clearances on entity-level consolidation information within the set timeframes. However, we were disappointed in the number of "except for" clearances we received (in other words, clearance of most but not all of the information provided for consolidation) and the number of unadjusted errors.

1.8
Some common themes in the "except for" clearances and unadjusted errors reported to us were:

  • There were eight "except for" clearances relating to revaluations of property, plant, and equipment. Generally, further work had to be done by the entities to resolve audit queries, or valuers' representation letters needed to be obtained.
  • Auditors reported unadjusted errors relating to commitments for seven entities. These errors highlighted that there is a need to improve entities' understanding of what should be reported as a commitment in the consolidation reporting template.
  • Although the information on financial instruments reported by entities generally improved, the auditors of five entities identified significant errors in accounting for, classifying, or disclosing financial instruments.

Discount rates for long-term liabilities

1.9
The operating balance and net worth reported in the Government's financial statements are significantly affected by changes in discount rates and other assumptions applied to key liabilities. These liabilities include:

  • Accident Compensation Corporation (ACC) outstanding claims liability of $23,786 million (2008: $18,006 million), and
  • the Government Superannuation Fund (GSF) retirement plan liability (net of plan assets) of $8,988 million (2008: $8,257 million).1

1.10
These two liabilities are valued each year using actuarial valuation models, which forecast expected future payments and then discount these payments back to a present value using risk-free discount rates that match the period of the liability. ACC uses an external actuary to value the ACC claims liability, while the Government Actuary values the GSF liability with external actuarial assistance.

1.11
The valuations are sensitive to changes in key actuarial assumptions, such as risk-free discount rates and inflation rates (price and wage). The Government's financial statements include extensive disclosures about the two liabilities in Notes 25 and 26, which include sensitivity analysis about those key assumptions.

1.12
Last year, we highlighted the sensitivity of these liabilities to changes in discount rates and noted that there was a small variance in the discount rates applied by the GSF and ACC. In particular, we recommended that the Treasury "closely monitor the discount rates proposed for liability valuations by ACC and GSF" and "confirm that the rates are appropriate and that differences between the two rates are supportable."

1.13
When the Treasury reviewed the 2008/09 year-end consolidation reporting by the GSF and ACC, it identified that there were significant differences in the long-term discount rates used to value the ACC and GSF liabilities. At the long term, the ACC liability was valued using a discount rate of 6.0% per annum, whereas the Government Actuary valued the GSF liability for the Government's financial statements using a discount rate of 8.6% per annum. The Treasury was concerned about the reasonableness of the long-term discount rate applied in the GSF valuation. Because of the size and long-term nature of the liabilities, there was concern that the discount rates used may have resulted in a material misstatement of the liabilities included in the Government's draft financial statements provided for audit.

1.14
The Treasury investigated the reasons for the difference in discount rates and the methodologies used to determine discount rates over the life of the liabilities. This resulted in the Treasury directing the Government Actuary to recalculate the GSF retirement plan liability at 30 June 2009 based on the Treasury-determined discount rates. The recalculated GSF liability using the Treasury-determined rates was $807 million higher than the initial valuation, with a corresponding increase in the Government's deficit for the year. The Treasury did not direct ACC to change the discount rates used to value the ACC liability.

1.15
We had to carry out considerable extra audit work to satisfy ourselves about the appropriateness of the valuation of the ACC and GSF liabilities, given the initial significant differences in long-term discount rates. We had discussions with the Treasury, the Government Actuary, and ACC and its actuaries to understand the approaches adopted to derive the discount rates.

1.16
Although we are satisfied with the outcome of the discount rates issue, we are disappointed that this issue was identified only in August 2009. Given our previous recommendation to the Treasury, we consider that this issue should have been addressed much earlier. In our view, the Treasury should have been closely monitoring the discount rates proposed to be used in the ACC and GSF valuations. This would have enabled the Treasury to identify the initial significant difference in the discount rates sooner and consider whether a long-term solution to this issue could be found.

1.17
Although the Treasury acted quickly and appropriately to resolve this issue once it was identified, the deadline for the statutory audit sign-off of the Government's financial statements led to the Treasury finding a short-term solution. There were considerable inefficiencies, particularly in audit time and cost. We also understand that the Government Actuary had had discussions with the Treasury in the previous 18 months with a view to working together to review the discount rate methodology, but had not been able to progress this with the Treasury.

1.18
We have recommended that the Treasury work with the Government Actuary and ACC during 2009/10 to agree a consistent approach to the derivation of risk-free discount rate and inflation assumptions to be used in the Government's financial statements.

1.19
We discuss in more detail below the reasons for the differences in the discount rates and how we were able to reach the conclusion that the discount rates used in measuring the GSF and ACC liabilities in the Government's financial statements are acceptable.

How and why we concluded that the discount rates are acceptable

1.20
The approaches used to derive the discount rates are based on market yields for Government bonds. The longest-term Government bonds mature in 2021 (that is, in 12 years' time). The main difference in valuing the ACC and GSF liabilities arises in extrapolating discount rates for the duration of the liabilities, which exceed 50 years. The original GSF approach, which had been used for some years, was based on implied forward rates from market yields of all bonds, including the 2021 bond, and used this market-based data to extrapolate the longer-term discount rates. The ACC and Treasury approaches are based on the same market rates at the short end, but move to a long-term nominal discount rate of 6.0%. That rate is based on recent historical averages of 10-year Government bond yields.

1.21
While the revised GSF (as directed by the Treasury) and ACC discount rates are the same beyond 15 years, the rates diverge between years 7 and 15. The divergence in the discount rates is largely due to ACC applying less weight than the Treasury to the nominal yield data for bonds with a term exceeding seven years.

1.22
Deriving discount rates is complex, so we asked an external actuary for advice on the approaches used by the Treasury, ACC, and the Government Actuary. This let us assess the acceptability of the long-term discount rates and the divergence in discount rates between years 7 and 15. Our actuary told us that:

  • There is considerable judgement involved in extrapolating long-term discount rates beyond available market data and determining the weighting to apply to lightly traded Government bonds. There is no single correct method.
  • The absolute level of discount rates is less important than the gap between discount rates and assumed future inflation levels (the "real discount rate"), and that achieving consistency in this gap should be a key area of focus.
  • The initial GSF discount rates produced the highest long-term real discount rates.
  • Both the Treasury and ACC methodologies derive long-term nominal discount rates specifically by referring to long-term real discount rate assumptions. However, because of different inflation assumptions, the Treasury methodology used for the revised GSF valuation produces higher long-term real discount rates than the ACC methodology.
  • The ACC extrapolation applies less weight to yield data for bonds with a term exceeding seven years than does the Treasury extrapolation. There is limited evidence to suggest that longer-term New Zealand bonds are considerably less liquid than short-term bonds. Our actuary's preferred approach would be to apply similar weight to short-term and long-term bonds when determining nominal yields, then overlay this with consideration of the relationship to the longer-term inflation assumption adopted.
  • The rates calculated under both the Treasury and ACC methodologies are within a reasonable range for long-term real discount rates.

1.23
We concluded that the discount rates (and associated inflation rates) applied in measuring the GSF and ACC liabilities in the Government's financial statements was acceptable at 30 June 2009. This is after considering:

  • the advice from our expert actuary;
  • the work of our Appointed Auditors for ACC and the GSF;
  • the views of ACC's external actuaries;
  • the Government Actuary's advice that he was comfortable, as an interim solution, that the amended approach complied with NZ IAS 19 Employee Benefits;
  • the written representations we received from the Board of ACC about the valuation of the ACC liability and the appropriateness of the discount rates used in the valuation; and
  • the written representations we received from the Secretary to the Treasury about the appropriateness of the discount and inflation rates applied in measuring the GSF and ACC liabilities.

1.24
We also considered the effect on the ACC liability if it were to be recalculated based on the Treasury discount rates. ACC calculated that the liability would reduce by $672 million if the calculation was based on the Treasury discount rates (with appropriate amendment of inflation assumptions). This would cause a reduction of the same amount in the Government's deficit for the year.

1.25
Because the measurement of these liabilities and the operating balance are particularly sensitive to changes in the discount rate and inflation assumptions, we asked the Treasury to increase the disclosures in this area in the Government's financial statements. The Treasury agreed to do this. The improved disclosures include:

  • specific comment in the Commentary to the Government's financial statements about sensitivity of the large long-term liabilities to underlying assumptions, such as discount rates and inflation rates;
  • additional narrative on sensitivities in the ACC and GSF notes and also in the "Judgements and Estimations" section of the accounting policies; and
  • additional analysis of key assumptions in the ACC and GSF notes.

1.26
In addition, the Treasury proposed a new disclosure of undiscounted future cash flows, by period, for both ACC and the GSF.

1.27
We consider that these enhanced disclosures, together with the existing detailed note disclosures, provide appropriate information about the exposures of the Crown to these schemes. They appropriately highlight to the readers of the Government's financial statements the significant sensitivity of the value of the ACC and GSF liabilities to their underlying assumptions.

Retail Deposit Guarantee Scheme

1.28
In October 2008, the Government introduced the Retail Deposit Guarantee Scheme (the scheme). By 30 June 2009, 73 financial institutions had joined the scheme and the amount of funds subject to the guarantee totalled $124 billion. Detailed information about the scheme is disclosed in Note 30 to the Government's financial statements.

1.29
As at 30 June 2009, the Treasury has recorded a provision of $816 million for future payments under the scheme. The provision has been determined based on the likelihood of default actions triggering the guarantee and the expected loss given default (amounts payable to depositors less assets realised). The provision encompasses an amount for:

  • non-bank financial institution guarantees that are considered likely to be called on; and
  • estimated interest that would be payable to qualifying depositors for those institutions where a defaulting event is considered probable.

1.30
The Treasury's assessment of which non-bank financial institutions are likely to call on the guarantee has been determined using financial information from the Reserve Bank of New Zealand and external inspectors engaged to carry out detailed reviews of the financial institutions' loan books, funding arrangements, and operational structures.

1.31
Key assessments and assumptions used in determining the provision include the probable risk of default for each institution, probability of default for each institution's loan book, and the loss given default for each asset class.

1.32
The provision has been determined based on the scheme not extending beyond 12 October 2010. While this was the position at 30 June 2009, the Government decided in August 2009 to extend the scheme on amended terms. This has been treated as a non-adjusting post balance date event, which means that it has been disclosed in the Government's financial statements but the amount of the provision has not been adjusted. We agree with this approach.

1.33
The estimated interest that would be payable to qualifying depositors is a significant component of the provision. The Treasury has refined the calculation of the interest component of the provision following the High Court ruling on Mascot Finance Limited. The High Court ruling clarified that, based on the particular form of trust deed, interest is payable until full repayment of the principal is made. While we consider the assumptions to be reasonable in the circumstances, there is considerable uncertainty about the behaviour of investors after an event of default. Accordingly, there may be a significant deviation from this estimate.

1.34
Overall, we are satisfied that the provision of $816 million is based on reasonable assumptions and is appropriate in the circumstances. Nevertheless, we believe a wide range of outcomes are still possible under the scheme.

1.35
We have recommended that the high-level approach taken to date to determining the Crown's exposure and establishing the provisions for these institutions needs to be tested by completing a fuller analysis of each institution. The focus needs to be on testing the Reserve Bank's loss given default assumptions, and modelling the cash flow gap between paying out claims and receiving the proceeds from recovery of the institution's assets.

1.36
A finance manager was appointed to support the Treasury's deposit guarantee team in June 2009. We have recommended that this role should include specific responsibility for the integrity of the financial information used for determining the Crown's exposure. The responsibilities should include obtaining as accurate financial information as possible for individual institutions, and establishing financial controls over the provisioning calculations.

Tax assessments for structured finance transactions

1.37
Terminal taxation revenue is normally recognised in the Government's financial statements when assessments are made. However, in past financial years, the Government's financial statements did not recognise taxation revenue assessed for "structured finance" transactions (predominantly in the banking industry). This was because the tax revenue relating to the transactions was in dispute and could not be reliably measured. We accepted this treatment because of the complexity of the issues being disputed with the financial institutions concerned, and because there was no legal precedent for such transactions.

1.38
The judgement on the first court case against the Bank of New Zealand (BNZ), released during 2008/09, found in favour of the Commissioner of Inland Revenue. As a result, Inland Revenue and the Treasury reviewed the previous accounting treatment for these assessments. They considered that, as at 30 June 2009, the uncertainty of recovery had been sufficiently reduced to justify recognising the assessments as taxation revenue. Accordingly, taxation revenue of $1,423 million (for all of the cases) was recognised in the Government's 2008/09 financial statements. This position is based on the outcome of the BNZ case together with opinions from Inland Revenue's legal team and Crown Law about the similarity of the other structured finance cases to the BNZ case and the likelihood that the Crown's cases will succeed.

1.39
However, given the complexity of the cases and the sums of money involved at 30 June 2009, it was considered likely that the judgements would be appealed and that it may be some years before the final amount of tax owing will be known. Therefore, the Government's financial statements have also disclosed a contingent liability to reflect this. A contingent asset of $1,191 million was also disclosed (in Note 32) for use of money interest on the structured finance transaction assessments. This contingent asset is for the maximum interest the financial institutions would be required to pay.

1.40
The Government's financial statements have not recognised any revenue or receivable relating to penalties associated with the structured finance transactions. This was because any penalties that may be imposed are at the discretion of the Commissioner. (The revenue recognition point for penalties is at the point that Inland Revenue determines, calculates, and communicates penalties to the taxpayer.) Disclosure about penalties is included in the comment on Contingent Assets in Note 32. The disclosure is unquantified because of the uncertainties at 30 June 2009 about the level of penalties that may be imposed.

1.41
We agreed with the Treasury's treatment of the structured finance assessments as at 30 June 2009. However, we noted during our audit that this position would need to be reconsidered as future cases or appeals were decided by the Courts.

1.42
After we completed our audit, the High Court judgement on the Westpac case has also found in favour of the Commissioner. This was followed on 23 December 2009 by the Commissioner and the respective banks reaching settlement agreements under which the banks will pay 80% of the tax in dispute ($1.2 billion). Interest will also be due, but the final figure can only be determined after new assessments are made, statements of account issued, and transfers made from tax pools. We understand that, under the settlement agreements, the Commissioner will not impose any shortfall penalties.

Tax revenue recognition policies

1.43
In recent years, we have raised a number of issues about revenue recognition policies for income tax, particularly about the revenue recognition point for provisional tax and the treatment of payments into provisional tax pooling accounts.

1.44
We are pleased with the responses to the issues that we raised. However, there remain areas where further consideration of revenue recognition policies is required. Given the large amounts involved, any change in revenue recognition policies can have a significant effect on the Government's financial statements.

1.45
During the past couple of years, a number of companies have been helping the public with seeking tax refunds from Inland Revenue. These companies review taxpayer records and identify any refunds due to the taxpayer. Where a refund is due, they help the taxpayer to request a personal tax summary, as a step towards applying for a refund. There are an increasingly significant number of taxpayers applying for refunds in this manner.

1.46
Inland Revenue and the Government currently do not accrue for (or disclose as a contingent liability) any refunds relating to personal tax summaries requested after balance date that relate to earlier periods. We have accepted the non-recognition of these liabilities based on materiality and consistency with prior liability recognition points.

1.47
We understand that Inland Revenue plans a review of its policies for recognising taxation revenue during 2009/10. We have recommended that the Treasury support Inland Revenue in this review and ensure that the issue of income tax refunds is included.

State highways valuation

1.48
The independent valuation of the state highway network as at 30 June 2009 is $24 billion (2008: $21 billion). By value, it is the largest physical asset on the Government's balance sheet. Note 20 to the Government's financial statements contains detailed information about the state highways valuation.

1.49
Last year, we reported that the external valuer for the New Zealand Transport Agency (NZTA) had expressed concerns that the average unit costs used in the valuation may not be appropriate for some high-value urban projects. The valuer was unable to accurately quantify the effect of this issue, but indicated it could result in an undervaluation of the network.

1.50
We recommended that NZTA investigate the matter further during 2008/09. Work has progressed on revising the methodology, but has not yet been fully completed. NZTA proposes to arrange an independent peer review of the revised methodology, because of the potential effect on the state highway network valuation and the potential variability depending on land use intensity and traffic volumes. NZTA will begin implementing the revised methodology after it is endorsed by an independent reviewer.

1.51
We again have recommended that Treasury work with NZTA to review the approach to valuing the state highway network during the coming year, with particular consideration of the costs of construction in congested/high-value locations. It is important for this work to be concluded in a timely manner, given the potentially significant effect on the Government's financial statements.

1.52
The potential undervaluation noted by NZTA's external valuer was based on a review of three large state highway construction projects where the actual costs of construction were in excess of the average unit costs used in the valuation. The additional costs arose from traffic management, environmental compliance, utilities, increased construction costs as a result of the restrictions imposed by the built environment, and the significant costs associated with re-establishing the interface with adjacent properties. This implied a potential undervaluation of urban state highways and the network as a whole.

1.53
Other issues we reported last year have been satisfactorily resolved. We highlighted issues in the methodology and quality assurance processes for the state highways valuation. We are satisfied that the valuation process and quality assurance has improved significantly from 2008. We also highlighted an issue with the indexing of land valuations that may be causing inaccuracies in the valuation. To resolve this, NZTA successfully completed a full revaluation of all land holdings for the Government's 2008/09 financial statements.

The Kyoto Protocol net position

1.54
The best estimate of the Kyoto Protocol net position at 30 June 2009 is a $207 million asset (2008: $562 million liability). This position is based on a surplus of 9.6 million Kyoto Protocol emission units (2008: 21.7 million deficit) measured using an exchange rate of EUR 0.4628 = $NZ1 and a carbon price of EUR 10.00 for each unit (2008: EUR 12.50 for each unit).

1.55
In 2006/07, an independent UK-based firm, AEA Technology, carried out a review of the robustness of the assumptions and methodology underlying the projections for the net position under the Kyoto protocol. In 2007/08, we recommended that a further independent review of the assumptions and methodology underlying the projections be completed during 2008/09.

1.56
Because of the late timing of the request for tender, the availability of suitably qualified experts, and the timetable for completing the Government's financial statements, a suitable expert could not be found to complete an independent review in 2008/09. We are disappointed that this matter was not addressed earlier.

1.57
We have recommended that an updated review of the assumptions and methodology underlying the Kyoto projections be carried out during the 2009/10 financial year. We understand that an external review has recently been carried out.

1.58
During our 2008/09 audit, we considered whether it was appropriate to recognise the forecast net surplus as an asset. We agreed that an asset could be recognised because there was evidence of an existing market for Kyoto Assigned Amount Units (AAUs). During the year, the Government allocated some of its AAUs to the forestry sector, and some of these have since been sold on international markets.

1.59
The movement in the projected balance of Kyoto Protocol emission units is set out in the Net Position Report 2009. New Zealand's projected balance of Kyoto Protocol units during the first commitment period, which is published by the Ministry for the Environment. The movement in the projected emission units and the movement to a surplus rather than a deficit is mainly because of the following factors:

  • Increased net removal of carbon from planted forests, due to new information on post-1989 planted forests that indicates these forests are removing more carbon dioxide per hectare than previously assumed.
  • Based on an intentions survey, emissions from deforestation are projected to be lower in 2009 than in 2008 due to falling profits from transferring the land to dairy use and implementation of the emissions trading scheme.
  • Agriculture emissions are projected to be lower due to the effects of drought in 2008 and a continuing decline in animal numbers.

1.60
The size of the surplus 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 estimate includes consideration of the effects of the emissions trading scheme as proposed at that time.

1.61
The Kyoto Protocol asset is the Ministry for the Environment and the Treasury's best estimate of the likely position under the Protocol. However, it should be noted that the Kyoto net position asset is, by its nature, more uncertain than most other items in the statement of financial position. It is likely that successive estimates will change as more updated information becomes available, better systems are implemented, and some uncertainties are reduced. Some of the main aspects of the Kyoto provision that are subject to fluctuation over time include:

  • the price for each tonne of carbon;
  • the exchange rate with the Euro; and
  • the various assumptions underlying the calculation of the emissions and sinks (for example, forecasts of GDP, oil prices, population growth, and the effect of the emissions trading scheme).

1.62
Consistent with previous years, no liability for periods beyond 2012 has been recognised because New Zealand currently has no specific obligations beyond the First Commitment Period. Any obligations in future periods have yet to be negotiated.

1.63
A contingent liability of $1,995 million has been disclosed for the first time this year for the Kyoto Protocol. It relates to the future agreements for commitment periods after the Kyoto Protocol's 2012 end point. In the first Kyoto commitment period, New Zealand has claimed credits for 92.3 million tonnes of carbon removals from forests. The disclosure of this contingency highlights that, on harvest of the forests in future commitment periods, the carbon will be released and there will be an associated liability.

Purchase of Toll (New Zealand) Limited

1.64
The Crown purchased Toll (New Zealand) Limited on 1 July 2008. The initial fair value assessment of the acquired assets and liabilities showed that the purchase consideration exceeded the fair value of the assets and liabilities acquired by $255 million. This has been appropriately expensed during 2008/09.

1.65
Detailed information on the acquisition has been disclosed in Note 34 to the Government's financial statements. We reviewed that note and agree that it meets the requirements of NZ IFRS 3 Business Combinations.

Related parties

1.66
NZ IAS 24 Related Party Disclosures requires disclosure of transactions between the Government reporting entity and key management personnel, their close family members, or entities they control, jointly control, or significantly influence. Although we are not aware of any significant transactions that require disclosure as a result of this requirement, currently there are no mechanisms in place to collect all the information about such transactions.

1.67
Information on Ministers' interests is recorded in the register of pecuniary interests, but 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.

1.68
During our 2008/09 audit, financial reporting standard-setters were considering amendments to NZ IAS 24. The Treasury decided to await the outcome of this work before taking the issue further. We agreed with the Treasury's approach.

1.69
The related party transaction disclosures in Note 7 to the Government's 2008/09 financial statements are consistent with those in the 2007/08 financial statements. As well as the specific disclosures required about remuneration of key management personnel (Ministers of the Crown who are members of Cabinet), there is specific disclosure about other potential related party relationships and transactions that might exist. This states:

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.

1.70
The above disclosure was agreed as appropriate, given the Treasury's decision to await the outcome of the standard-setters' revision of NZ IAS 24.

1.71
The Accounting Standards Review Board approved an amendment to NZ IAS 24 in November 2009. The Treasury is currently considering the effect of this amendment on the Government's financial statements.

Audit Committee for the Government's financial statements

1.72
We are pleased that the Treasury extended the mandate of its Risk and Audit Committee to include consideration of the Government's financial statements. We had previously recommended that the Treasury investigate establishing an audit committee for those statements.

1.73
We met with the Risk and Audit Committee three times during the year to discuss our audit of the Government's financial statements.

1: The valuation of the GSF liability for the Government's financial statements is completed under NZ IAS 19 Employee Benefits, while the valuation for the GSF financial statements is completed under NZ IAS 26 Accounting and Reporting by Retirement Benefit Plans. These valuations are different.

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