Part 11: Memorandum accounts in central government

Central government: Results of the 2011/12 audits.

In this Part, we examine what memorandum accounts are and their role in ensuring public accountability. We discuss entities with significant memorandum accounts and the business risks facing those entities. We then look at the historical trends and the future use of memorandum accounts by entities.

What are memorandum accounts?

A number of public sector entities provide services that are not funded by the Crown but by third-party users of those services. Sometimes, this is referred to as "user pays". If entities provide services on a full cost-recovery basis and the revenue and expenses will not necessarily agree in each financial year, the entity must operate a memorandum account that records the accumulated surplus or deficit arising from providing the service.

The 2012 Treasury Instructions state that "full cost-recovery … applies where departments supply services to third parties in the absence of competition or under a statutory monopoly".39 The balance of each memorandum account is expected to trend to zero over a realistic period of time, with temporary deficits being met either from the entity's balance sheet or by a capital injection from the Crown.40

The use of memorandum accounts was implemented in 1995 to improve transparency around outputs for which costs are fully recovered through fees, levies, and other charges from third parties. Memorandum accounts also provide assurance from entities that they do not gain from over-recovery – that is, they do not make a profit. Requiring entities to prepare memorandum accounts ensures that they are accountable to those purchasing the services and wider stakeholders.

From 1 July 2011, departmental memorandum accounts changed from being "notional" to "real" accounts. This change means that entities are required to separately recognise memorandum accounts in their financial statements as opposed to a note disclosure that is mandatory for notional accounts. The accounting effect of this, as described in the Treasury Circular, is that:

... the portion of surpluses in any financial year from those departmental services subject to memorandum accounts are no longer required to be paid to Treasury as part of the department's surplus. The amount equivalent to deficits recorded on services subject to memorandum accounts needs to be added back to the net surplus that a department would be otherwise required to pay to Treasury for that financial year.

The prescribed accounting treatment is effective in that it allows entities to retain any surpluses derived from third-party revenue to meet any future deficits incurred for a particular service.

Significant memorandum accounts

Department of Internal Affairs – Passport Products memorandum account

The Department of Internal Affairs (DIA) has nine separate memorandum accounts disclosed in the notes to its financial statements for the year ending June 2012. Of these memorandum accounts, there is one balance significantly above zero. This is the Passport Products account, which had a surplus balance as at 30 June 2012 of $27.4 million.41 There are a number of factors that have resulted in this large surplus balance.

The Passport Products account, which includes all revenue and expenditure related to the issuing of passports and maintenance of the passport system, has had year-on-year account operating surpluses since 2007/08. The 2011/12 financial year was no different, with a surplus of $9.9 million recorded for the year, which was an increase from the 2010/11 surplus of $7.9 million. This increase in surplus can be attributed to systems enhancements that resulted in the ability to handle 2011/12 passport volume increases with only a modest increase in staff.

In the notes to its financial statements, DIA has disclosed that it will address the significant positive account balance and year-on-year surpluses through a passport fees review in 2012/13. Passport fees have not been reviewed since 2005 and a change in the fee should be effective in reducing the yearly surpluses.

Department of Labour– Visas and Permits memorandum account

The Department of Labour (now part of MBIE) had one memorandum account. This is the Visas and Permits memorandum account, which, as at 30 June 2012, had a deficit balance of $36.4 million.42 The account encompasses all revenue and expenditure related to the cost of visas and permits by the department on a full cost-recovery basis. As a result, there are various factors in the economic environment that affect the balance.

The deficit balance of $36.4 million as at 30 June 2012, disclosed in Note 27 to the financial statements, is the result of year-on-year deficits, including a $13.6 million deficit for 2011/12. The department attributes the deficit to lower than expected volumes of visa applications (particularly student visas) and the effect of the Canterbury earthquake in February 2011 in reducing the number of people coming to New Zealand.

To address the current deficit on the memorandum account, Cabinet has approved an increase in immigration visa and permit fees, from 2 July 2012. Although the increase in fees is likely to be offset by the International Global Management System (IGMS)43 operating deficits from 2011/12 to 2016/17, it is expected that a net operating surplus will occur from 2017/18. This will reduce the account deficit and bring it closer to zero.

Ministry of Economic Development – Vote Commerce: Registration and Provision of Statutory Information memorandum account

The Ministry of Economic Development (MED), which is now part of MBIE, had seven memorandum accounts disclosed in the notes to MED's financial statements for the year ended 30 June 2012. A number of these accounts have balances significantly above or below zero. The most significant of these is the Registration and Provision of Statutory Information memorandum account, which has a deficit balance of $5.1 million after a capital injection from the Crown of $6.0 million.44

The Registration and Provision of Statutory Information memorandum account captures all revenue and expenditure related to the administration of companies in New Zealand. As a result, the amount of revenue and expenditure related to this service is heavily influenced by economic conditions. In the notes to the financial statements, MED discloses that the Companies Office has a strategy of maintaining the memorandum account in a balanced state over the long term. This allows for fluctuations in volumes because of changes in economic activity and other matters. MBIE will address surpluses and deficits through volume considerations and regular reviews of the pricing schedule.

The capital injection from the Crown to recover the 2012 deficit is repayable through projected future memorandum account surpluses.

Department of Building and Housing – Occupational Licensing – Building Practitioners memorandum account

The Department of Building and Housing (also now part of MBIE) provides a number of "user pays" services to third parties, the largest of which is the occupational licensing of building practitioners. The service was introduced from November 2007 and is the result of amendments to the Building Act 2004 that now require that all building practitioners must be licensed to carry out building work.

As at 30 June 2012, the accumulated balance for this service's memorandum account was negative $15.3 million. The memorandum account has been in existence since 2003/04, and it has recorded an operating surplus only once since that year. To reduce the account deficit, the department has disclosed in the notes to its financial statements that it will review the cost structures supporting the service.45

Other "user pays" accounts

There are other "user pays" accounts that central government entities use to disclose the revenue and expenditure attributed to services provided to third parties. CAA and NZTA are two such entities that provide "user pays" services. Although the Treasury Circular on memorandum accounts does not apply to these entities, it is considered good practice for entities to disclose revenue and expenses related to providing services to third parties to promote transparency.

Civil Aviation Authority – Aviation security charges

The Aviation Security Service, which is the operating arm of CAA, provides passenger security services to airlines and, in return, receives payment for these services on a per passenger basis. These services are administered on a full cost-recovery basis, and it is not intended for a profit to be made from their supply.46

As at 30 June 2010, CAA had an accumulated surplus balance of $49.8 million in its international and domestic passenger charges reserve. This was a result of a build-up of significant year-on-year operating surpluses for these services. To reduce the account balance surplus, the security fee was reduced by $5 per passenger effective from 1 April 2010. This led to operating deficits for passenger security services in 2010/11 and 2011/12 and reduced the reserve surplus to $23.1 million as at 30 June 2012.47

New Zealand Transport Agency – Driver licensing

NZTA is another entity that is not subject to the Treasury Circular on memorandum accounts but provides a number of "user pays" services related to the transport sector. These services include, but are not limited to, border inspections, certification reviews, driver licensing, and tolling.48 The revenue and expenditure as well as the accumulated account balance for each service are disclosed by NZTA in the notes to its financial statements.

Of NZTA's "user pays" services, driver licensing represents the biggest portion of third-party revenue. The amount of total revenue disclosed in the memorandum account for driver licensing for the year ending 30 June 2012 is $29.8 million. However, the actual amount received from third parties is $28.4 million because NZTA received $1.4 million from the Crown to subsidise driver tests. Therefore, if NZTA were subject to the Treasury Circular on memorandum accounts, this service would not be considered a memorandum account activity because the Treasury Circular requires that the service be fully funded by third parties.

Significant business risks for entities with memorandum accounts

Account balance monitoring systems

For entities with memorandum account balances, having effective monitoring systems in place is important. Entities should ensure that there is regular monitoring of account balances on either a monthly or quarterly basis. This will allow management to see how revenue and expenditure for a particular service is tracking against budget. Management will then be able to determine if the pricing and costing of the product is realistic and put in place plans to ensure that the account balance is kept stable.

Without regular and effective monitoring of account balances, there is a risk that memorandum account balances will run significant surpluses or deficits without management being aware. This could occur either through incorrect pricing or costing of the service. Appropriate monitoring also allows management to see how current economic conditions are affecting the provision of services to third parties.

Plans to reduce deficits/surpluses

Regular monitoring of account balances will allow management to put plans in place to reduce significant deficits and surpluses. To reduce the surpluses or deficits, management can implement regular service pricing reviews, perform sensitivity analysis for different economic conditions, and assess the viability of funding deficits from their balance sheet.

If clear plans are not put in place, entities run the risk that surpluses or deficits become uncontrollable. Deficits will require considerable capital contribution and surpluses will require major price cutting, leaving previous users of the service feeling as though they have paid for services provided to future users.

Cost allocation systems

A robust cost allocation system allows an entity with a memorandum account to accurately apportion direct and indirect costs to a particular service. Examples of this include the apportionment of staff costs where staff members are working in several different service areas, and the apportionment of premise costs where a premise is used to provide a number of services.

Accurate allocation of costs is important because it reduces the risk of third parties bearing the costs associated with other activities that should be funded by the Crown. It also ensures that the Crown is not inadvertently subsidising a service that should be paid for by third parties. As well as ensuring that costs are borne by the correct party, accurate cost allocation is a powerful tool for effective service costing and fair pricing of the service.

Historical trends and good practice

Our review of a number of memorandum accounts over time shows that surpluses and deficits fluctuate because of changes in economic and other conditions, pricing structures, and, in some cases, service cycles.

The Department of Labour Visas and Permits memorandum account shows the effect that economic and other conditions can have on memorandum account balances. From the year ending 30 June 2008, the accumulated account balance went from a surplus of $10.2 million to a deficit of $36.4 million in 2011/12. This was caused by a number of significant net memorandum account deficits, which can be attributed to the February 2011 Canterbury earthquake and volatile economic conditions in countries that would usually send their students to New Zealand for study.49

Other factors that can affect memorandum account balances can be seen by looking at the balance trend for DIA's Passport Products memorandum account. Since 2007/08, there has been a steady increase in the net memorandum account surplus for Passport Products from $0.253 million in 2007/08 to $9.9 million in 2011/12. The result is that, as at 30 June 2012, the account has a surplus balance of $27.4 million. This is mainly because of the period of time that has passed since the last fee review in November 2005 and an increased passport volume (because of the change to a five-year passport cycle).50

The benefit of reviewing service pricing was shown in the case of CAA's Passenger Security Services account (see paragraph 11.19). By reducing the service price, CAA reduced the account's accumulated surplus by $26.7 million in just over two years.51 This is in line with our good practice guide, Charging fees for public sector goods and services, which suggests that there should be regular reviews to ensure that fees remain appropriate and that the assumptions used continue to be relevant.52

Future use of memorandum accounts

With the Government's focus on achieving an operating surplus by 2014/15 and delivering better public services under tight financial constraints, it is possible that there will be an increase in the number of memorandum accounts in the coming years. Reduced levels of funding for entities may lead to a "user pays" approach for some services.

In times of fiscal constraint, memorandum accounts provide a useful accountability tool for both third-party users of services and wider stakeholders. They allow third parties to see whether services are being fairly priced and ensure that entities are not benefiting from overcharging for a service.

39: Treasury Instructions (2012), page 63, available on the Treasury's website (

40: Treasury Circular 2011/10: Guidance for the Operation of Departmental Memorandum Accounts, page 1, available on the Treasury's website (

41: Department of Internal Affairs, 2011-12 Annual Report.

42: Department of Labour, Annual Report for the year ended 30 June 2012.

43: The IGMS is an online system for managing immigration applications. It will replace the current Application Management System.

44: Ministry of Economic Development (2012), Annual Report 2011/12.

45: Department of Building and Housing (2012), Annual Report 2011-2012.

46: Civil Aviation Authority of New Zealand (2012), 2011/12 Annual Report.

47: Civil Aviation Authority of New Zealand, 2009/10, 2010/11, and 20111/12 Annual Reports.

48: New Zealand Transport Agency (2012), NZ Transport Agency annual report for the year ended 30 June 2012.

49: Department of Labour, Annual Reports 2007/08–2011/12.

50: Department of Internal Affairs, Annual Reports 2007/08–2011/12.

51: Civil Aviation Authority of New Zealand, Annual Reports 2008/09–2011/12.

52: Controller and Auditor-General (2008), Charging fees for public goods and services, page 12, paragraph 2.23.

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