Part 5: Forecast financial statements for 2010/11

Annual Plan 2010/11.

Introduction

The Controller and Auditor-General's forecast financial statements have been prepared in accordance with sections 38, 41(1), and 45G of the Public Finance Act 1989, and are consistent with generally accepted accounting practice. The purpose of the forecast financial statements is to facilitate Parliament's consideration of the appropriations for, and planned performance of, the Controller and Auditor-General. Use of this information for other purposes may not be appropriate. Readers are cautioned that actual results are likely to vary from the information presented here, and that the variations may be material.

These forecast financial statements have been prepared on the basis of assumptions as to future events that the Controller and Auditor-General reasonably expects to occur, associated with the actions she reasonably expects to take, as at the date that this information was prepared.

It is not intended that this published material will be updated.

Statement of significant underlying assumptions

The forecast financial statements on pages 46-62 have been compiled on the basis of existing government policies and after the Controller and Auditor-General consulted with the Speaker and the Officers of Parliament Committee. The main assumptions are that:

  • The Controller and Auditor-General's portfolio of entities will remain substantially the same as for the previous year.
  • The Controller and Auditor-General will continue to deliver the range of products currently provided and will also be in a position to deliver new products, or existing products in new ways, to cope with changing demands.
  • The scale of annual audits will remain substantially the same, and 2010/11 is not an LTCCP audit year.
  • The balance of activity associated with inquiries and with advice to Parliament and others will continue to vary because of increases in demand and the effects of the Public Audit Act 2001.
  • The Controller and Auditor-General will continue to use audit expertise from both Audit New Zealand and private sector accounting firms.

These assumptions are adopted as at 1 April 2010.

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 purpose 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 IRFS).

Measurement base

The forecast 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. The functional currency of the Office is New Zealand dollars.

Statement of compliance

This Annual Plan complies with Financial Reporting Standard No. 42: Prospective Financial Statements.

The forecast financial statements for 2010/11 comply with the applicable financial reporting standards, which include NZ IFRS and other applicable financial reporting standards, as for a public-benefit entity.

Accounting policies

Income

Income is measured at the fair value of the consideration received. 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.

Fee revenue generated by the Office for audit and assurance services is recognised as the work progresses and time is allocated within work in progress to public entities.

Income of audit service providers

Fee revenue generated by contracted audit service providers for audits of public entities 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

Expenses of audit service providers

Fees for audits of public entities carried out by 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 Comprehensive income statement.

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 Comprehensive income statement.

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 Comprehensive income statement. Overdue receivables that are renegotiated are reclassified as current (that is, 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 Comprehensive income statement.

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 - 5 years (20% - 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 Comprehensive income statement.

The useful life and associated amortisation rate of computer software is estimated at between 2.5 and 5 years (20% to 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 Comprehensive income statement. 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 Comprehensive income statement 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.

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 forecast 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.

Changes in accounting policies

There have been no changes from the accounting policies adopted in the last audited financial statements.

Prospective comprehensive income statement

for the year ending 30 June 2011

This statement reports the revenue and expenses relating to all outputs (goods and services) that we produce. A supporting statement showing the revenue and expenditure of each output class is on page 62.


2009/10 2010/11

Budgeted*
$000
Estimated actual**
$000
Forecast
$000
Income


Crown funding 9,913 9,859 9,948
Audit fees – Departments 9,467 8,374 8,145
Audit fees – Other 29,079 28,657 27,455
Income of contracted audit service providers 24,182 25,924 26,143
Total income 72,641 72,814 71,691
Expenditure


Personnel costs 35,921 33,851 33,467
Operating costs 11,366 11,750 10,624
Depreciation and amortisation 1,007 1,007 1,117
Fees paid to contracted auditors for audits of public entities 24,182 25,924 26,143
Capital charge 165 264 302
Total expenditure 72,641 72,796 71,653
Total comprehensive income for the year - 18 38

* Budgeted figures reflect the Main Estimates of Appropriations for 2009/10.

** The amounts in this column reflect actual results to 28 February 2010 and the forecast results for the remaining four months to 30 June 2010.

Prospective statement of movements in taxpayers' funds (equity)

for the year ending 30 June 2011


2009/10 2010/11

Budgeted
$000
Estimated actual
$000
Forecast
$000
Taxpayers’ funds brought forward at 1 July 3,521 3,521 3,521
Surplus for the year - 18 -
Provision for repayment of surplus to the Crown - (18) -
Capital contribution - - 500
Taxpayers’ funds at 30 June 3,521 3,521 4,021

Prospective statement of financial position

as at 30 June 2011

This statement reports the total assets and liabilities. The difference between the assets and liabilities is called taxpayers' funds.





Budgeted as at
30 June 2010
$000
Estimated actual as at
30 June 2010
$000
Forecast as at
30 June 2011
$000
Taxpayers’ funds


General funds 3,521 3,521 4,021
Total taxpayers’ funds 3,521 3,521 4,021
Represented by:






Current assets


Cash and cash equivalents 2,216 2,765 3,271
Prepayments 210 210 205
Work in progress 2,293 2,293 2,201
Debtors and other receivables 4,778 4,778 4,514
Total current assets 9,497 10,046 10,191




Non-current assets


Plant and equipment 1,468 1,286 1,604
Intangible assets 929 1,013 1,014
Total non-current assets 2,397 2,299 2,618
Total assets 11,894 12,345 12,809




Current liabilities


Creditors and other payables 4,557 4,286 4,165
Repayment of surplus - 18 38
Employee entitlements 3,161 4,000 4,055
Total current liabilities 7,718 8,304 8,258




Non-current liabilities


Employee entitlements 655 520 530
Total non-current liabilities 655 520 530
Total liabilities 8,373 8,824 8,788
Net assets 3,521 3,521 4,021

Prospective statement of cash flows

for the year ending 30 June 2011

This statement summarises the cash movements in and out during the year. It takes no account of money owed to or owing by the Office, and therefore differs from the Prospective comprehensive income statement.


2009/10 2010/11

Budgeted
$000
Estimated actual
$000
Forecast
$000
 Cash flows from operating activities


Receipts from the Crown 9,913 9,859 9,948
Receipts from Departments 9,467 8,374 8,145
Receipts from other public entities 29,061 28,579 27,778
Payments to suppliers (7,942) (8,454) (7,031)
Payments to employees (35,844) (33,752) (33,367)
Capital charge paid (165) (264) (302)
Net GST paid (3,500) (3,700) (3,750)
Net cash flow from operating activities 990 642 1,421




Cash flows from investing activities


Receipts from sale of plant and equipment 111 111 155
Purchase of plant and equipment (907) (899) (1,202)
Purchase of intangible assets (150) (298) (350)
Net cash flow from (used in) investing activities (946) (1,086) (1,397) 




Cash flows from financing activities


Capital contribution - - 500
Repayment of surplus to the Crown (150) (486) (18)
Net cash flow from (used in) financing activities (150) (486) 482




Total net increase/(decrease) in cash held (106) (930) 506
Cash at the beginning of the year 2,322 3,695 2,765
Cash at the end of the year 2,216 2,765 3,271

* The Prospective statement of cash flows does not include the contracted audit service provider audit fees because these do not involve any cash transactions within the Office.

Reconciliation of surplus in the Prospective comprehensive income statement to the prospective net cash flow from operating activities

for the year ending 30 June 2011

This reconciliation discloses the non-cash adjustments applied to the surplus reported in the Prospective comprehensive income statement on page 54 to arrive at the net cash flow from operating activities disclosed in the Prospective statement of cash flows on page 57.


2009/10 2010/11

Budgeted
$000
Estimated actual
$000
Forecast
$000
Surplus - 18 38




Non-cash items


Depreciation and amortisation 1,007 1,007 1,117
Total non-cash items 1,007 1,007 1,117




Working capital movements


(Increase)/decrease in receivables and prepayments - 38 269
(Increase)/decrease in work in progress (15) (98) 92
Increase/(decrease) in payables (3) (198) (122)
Increase/(decrease) in current employee entitlements 18 (110) 55
Total net working capital movements 1 (368) 294




Investing activity items


Loss/(profit) on disposal of assets (18) (18) (38)
Total investing activity items (18) (18) (38)




Movements in non-current liabilities


Increase/(decrease) in employee entitlements - 3 10
Total movements in non-current liabilities - 3 10
Net cash flow from operating activities 990 642 1,421

Statement of forecast capital expenditure

for the year ending 30 June 2011

This statement discloses the forecast capital expenditure for the 2010/11 financial year (incurred in accordance with section 24 of the Public Finance Act 1989) that is primarily routine replacement and upgrade of the Office’s information technology, office equipment, and furniture and fittings.


Actual Actual Actual Actual Budget Estimated Forecast

June June June June June actual* June

2006 2007 2008 2009 2010 June 2010 2011

$000 $000 $000 $000 $000 $000 $000
Plant and equipment






Furniture and fittings 484 77 125 63 150 87 80
Office equipment 11 17 7 20 50 10 20
Motor vehicles 507 429 382 184 395 464 509
Computer hardware 373 445 114 318 311 338 593








Intangible assets






Computer software 176 254 151 927 150 298 350
Total 1,551 1,222 779 1,512 1,056 1,197 1,552

* Actual for the 8 months to 28 February 2010 plus forecast for the period March-June 2010.

Forecast details of non-current assets by category

as at 30 June 2011


As at 30 June 2010 Forecast Position as at 30 June 2011

Budgeted
Net Book
Value
Estimated
Actual Net
Book Value
Cost Accumulated
Depreciation
Net Book
Value

$000 $000 $000 $000 $000
Plant and equipment




Furniture and fittings 194 201 2,740 2,588 152
Office equipment 123 99 678 337 341
Motor vehicles 761 601 1,343 638 705
Computer hardware 390 385 2,957 2,551 406






Intangible assets




Computer software 929 1,013 3,667 2,653 1,014
Total 2,397 2,299 11,385  8,767  2,618 

Prospective appropriation statement

for the year ending 30 June 2011

This statement breaks down the expenditure reported in the Prospective comprehensive income statement (on page 54) and the Forecast output class operating statements (on page 62) with the corresponding appropriations appearing in Part B1 of Vote Audit for 2010/11 in the Estimates of Appropriations (parliamentary paper B.5, Vol. 1).


$000
Appropriations for output expenses
Legislative auditor (multi-class output appropriation):
Supporting accountability to Parliament 2,460
Performance audits and inquiries 6,587


Total legislative auditor 9,047
Audit and assurance services (revenue-dependent appropriation) 61,705
Audit and assurance services – Crown-funded small entity audits 150
Total appropriations for output expenses 70,902


Other expenses to be incurred by the Office
Remuneration of the Auditor-General and Deputy Auditor-General 751
Total other expenses 751
 Total 71,653

Forecast output class operating statements

for the year ending 30 June 2011


Revenue
Crown
Revenue
Depts
Revenue
Other
Total
Revenue
Total
expenses
Surplus

$000 $000 $000 $000 $000 $000
Output expenses












Audit and assurance services (revenue-dependent appropriation)

Scope: This appropriation is limited to the performance of audit and related assurance services as required or authorised by statute. The Auditor-General is required to audit the financial statements of the Government, public entities’ financial statements, and other information that must be audited. The Auditor-General is also enabled to perform other services reasonable and appropriate for an auditor to perform and to audit other quasi-public entities.

- 8,145 53,560 61,705 61,705 -







Audit and assurance services




Scope: This appropriation is limited to the performance of audit and related assurance services as required or authorised by statute for smaller entities, such as cemetery trusts and reserve boards.

150 - - 150 150 -







Statutory auditor function (multi-class output appropriation)


Basis – these output expenses use the same resources and contribute to the same outcome.







Performance audits and inquiries




Scope: This output class is limited to undertaking and reporting on performance audits and inquiries relating to public entities under the Public Audit Act 2001 and responding to requests for approvals in relation to pecuniary interest questions regulated by the Local Authorities (Members’ Interests) Act 1968.

6,587 - - 6,587 6,587 -







Supporting accountability to Parliament




Scope: This output class is limited to reporting to Parliament and others as appropriate on matters arising from annual and appropriation audits, reporting to and advising select committees, and advising other agencies on the requirements of parliamentary and related accountability systems, to support Parliament in its holding the executive to account for its use of public resources.

2,460 - - 2,460 2,460 -
Total output
expenses
9,197











Other expenses to be incurred by the Office
Remuneration of the Auditor-General and Deputy Auditor-General

751 - - 751 751 -
Total operating
expenses
9,948 8,145 53,560 71,653 71,653 -
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