Part 5: Forecast financial statements for 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 | - |