Appendix 1: Recurring key audit matters in the Government’s financial statements

Our audit of the Government’s financial statements and our Controller function.

This Appendix describes the key audits matters included in our audit report on the Government’s financial statements and describes the audit work we did.34

Key audit matters are those matters we consider to be the most significant in our audit of the Government’s financial statements. They are matters we consider to be complex, to have a high degree of uncertainty, or to be important to the public because of their size or nature.

We review the key audit matters each year to determine whether they remain relevant and if we should include any new audit matters. Below we describe those key audit matters that are recurring from previous years. This includes the change to the key audit matter relating to the value of property, plant, and equipment to include the rail network. A new key audit matter on climate change obligations is discussed in Part 1 of this report.

Calculating the value of other persons and companies tax revenue

Total tax revenue was $119.9 billion in 2023/24 ($111.7 billion in 2022/23). This included other persons tax revenue of $9.9 billion and companies tax revenue of $16.9 billion.

Why is this a key audit matter?

Tax revenue from other persons and companies is estimated because the final income tax owed for the year is known only when tax returns have been filed. This can happen more than a year after the tax year.

Estimating the amount of other persons and companies tax is challenging because significant assumptions and estimates are used. This means that a high degree of judgement is involved, including forecasting the performance of New Zealand’s and the global economy. Because of this, we treated the calculation of corporate and personal tax revenue as a significant audit risk and included it as a key audit matter.

Our audit work

We reviewed the systems, processes, and controls for receiving and reviewing provisional and final tax returns, assessments, and revenue. This included gaining an understanding of the information systems Inland Revenue uses to manage tax.

We tested the underlying data used in estimating tax revenue to ensure that it was relevant and appropriate. We reviewed the 2023 tax year estimation and compared it to the tax return information that Inland Revenue subsequently received to assess the methodology used for estimating tax revenue.

We also engaged independent economic experts to assess the assumptions about economic growth that could cause changes to expected tax revenue.

Several tax policy changes were implemented during the year. These included:

  • deductibility of co-operative company dividends;
  • denying depreciation deductions for commercial and industrial buildings;
  • increasing the trustee tax rate from 33% to 39%; and
  • restoring interest deductibility for residential property.

Inland Revenue recognised the impact of the deductibility of co-operative company dividends on its financial results, but it did not make adjustments for the other policy changes. This is because these changes only affected the final quarter of the year, and their impact was not material to the Government’s financial statements.

We concluded that the tax revenue estimation used a reasonable model, methodology, variables, and adjustments. We were satisfied that tax revenue for the year was reasonable and that the disclosures were appropriate, but we noted the high degree of estimation uncertainty.

Valuing property, plant, and equipment

The government owns a large portfolio of property, plant, and equipment. This portfolio had a carrying value of $283.8 billion at 30 June 2024 ($267.4 billion in 2022/23).

Why is this a key audit matter?

The government owns many assets that are difficult to value. The valuations of these assets are based on assumptions and information that involve a high degree of judgement. This includes considering the impact of economic conditions, such as the effects of interest rates and inflation.

Supply chain disruptions and labour supply constraints drove cost inflation in the construction sector. Assets that were valued on an optimised depreciated replacement cost approach were affected by this. Whether these cost changes are permanent or temporary is a matter of judgement.

Our audit work

For our audit of the Government’s financial statements, we looked at specific types of assets where complexity and uncertainty pose significant risks to the reliability of the assets’ valuations. These asset types are:

  • land;
  • state highways and the rail network; and
  • electricity generation assets.

When we audit the valuation of property, plant, and equipment, we typically test that the assumptions that valuations are based on are reasonable and that the information that the valuers used is robust. We assess the appropriateness of valuation approaches and confirm the competence, capabilities, and objectivity of independent valuers.

We also consider how valuers took current economic conditions into account, including the judgements they used to assess whether recent cost increases should be considered when assessing replacement costs – that is, whether they are temporary or whether they reflect sustained market conditions.

Land

The land that the government owns was valued at $80.9 billion at 30 June 2024.

The government’s land portfolio includes a wide range of different types of land that it uses for different purposes. Therefore, different approaches to valuation are used that consider the highest value and best use of the types of land.

Judgement is needed to determine the most appropriate approach to valuation. Valuation approaches include evidence from market-based sales data and rateable values.

We assessed the reasonableness of methods used to confirm that land valuations were not materially different from the land’s fair value. We also reperformed the calculations.

Where market data was used, we compared the information to external sources of information. We also discussed with valuers how economic factors and market conditions have affected valuations.

Where an index was used to record changes in value, we assessed the appropriateness of the index to other external data sources. We also compared the retrospective accuracy of indices applied in previous periods.

We concluded that the value of land at 30 June 2024 was reasonable and that the disclosures were appropriate.

State highways and the rail network

State highways (excluding land) were valued at $62.3 billion and the rail network (excluding land) was valued at $14.5 billion at 30 June 2024.

The value of state highways and the rail network cannot be measured precisely because of their unique nature. Significant estimates and assumptions are made about quantities and rates used to construct state highways and the rail network, the remaining useful life of the assets, and unit costs.

Our audit work included confirming that the controls, systems, and processes used to record costs and other asset information about the state highways and rail network were operating appropriately.

We were satisfied that the value of the state highways and rail network was reasonable and that the disclosures were appropriate.

Electricity generation assets

The valuation of the government’s electricity generation assets was $23.6 billion at 30 June 2024.

The government has a controlling interest in three electricity generating companies: Genesis Energy, Mercury, and Meridian Energy. These companies operate under a mixed ownership model.

Valuing the electricity assets of these companies is complex. It relies on significant assumptions about the future prices of electricity, generation costs, and how much electricity will be generated.

The assumptions used to value electricity assets are sensitive – even small changes to underlying assumptions can cause material movements in estimated values. The assumptions are also interdependent – changes in one assumption will affect the other assumptions used.

The main assumptions used to value electricity generation assets are:

  • future revenue and expenses;
  • generation volumes;
  • discount rates; and
  • wholesale electricity prices.

The three companies have a different mix of generation assets, including thermal, hydro, wind, and other asset types. All three companies valued their electricity assets at 30 June 2024. Each company used a future earning approach, but they used slightly different valuation methodologies.

We tested the sensitivities and assumptions in the different approaches that each company used. We compared forecast prices of electricity to the expected longer-term wholesale prices and market data where it was available.

We were satisfied that the value of electricity generation assets at 30 June 2024 was reasonable and that the disclosures were appropriate.

Valuing financial assets where market data is not available

Financial assets valued where market data is not available were valued at $27.1 billion at 30 June 2024.

Why is this a key audit matter?

The Government’s financial statements include financial assets that are valued using significant non-observable inputs (that is, where market data is not available for those assets). These financial assets include loans (including student loans), investments, and deposits. We considered these valuations as a key audit matter because the calculations are complex and involve a high degree of judgement and estimation.

The entities that hold a significant portion of these instruments are:

  • the New Zealand Super Fund;
  • the Government Superannuation Fund;
  • ACC; and
  • Inland Revenue (for student loans).

When there is no quoted market price for a financial asset, the value of the asset is estimated using an appropriate technique, such as a valuation model. These models are usually complex, using inputs from market data when available. Otherwise, inputs are derived from non-market data, which needs greater judgement.

Our audit work

Based on a sample of investments, we reviewed the valuation techniques and tested the controls and inputs used to determine the value of these financial assets.

As part of our audit, we reviewed the valuation techniques and tested the controls and inputs used to determine the value of these financial assets. We tested the controls over the data entered into financial systems, tested valuation approaches, compared the fair value of financial assets to independent information, and investigated any significant variances.

We were satisfied that the value of financial assets where market data is not available at 30 June 2024 was reasonable and that the disclosures were appropriate.

Valuing the Accident Compensation Corporation’s outstanding claims liability

An actuary, commissioned by ACC, valued ACC’s outstanding claims liability at $60.2 billion at 30 June 2024.

Why is this a key audit matter?

Estimating the value of ACC’s outstanding claims liability is complicated because it consists of many components that are aggregated to arrive at the overall estimate. We considered this valuation as a key audit matter because the calculation is complex and involves a high degree of judgement and estimation.

The assumptions used to determine the value of the outstanding claims liability included:

  • the risk-free discount rates and consumer price index assumptions published by the Treasury and that were used to calculate a present value of expected claims payments;
  • the risk margin for the inherent uncertainty in the estimate of the present value of expected claims payments;
  • the effects of inflation and innovation on future medical costs; and
  • how long it will take people to recover from their injuries.

These assumptions are closely linked and cannot be viewed in isolation. Changes in the assumptions can have a large effect on the value of the outstanding claims liability (and the gain or loss that is recognised).

Our audit work

We confirmed the competence, capability, and objectivity of the actuary used to value ACC’s outstanding claims liability. We tested their procedures and methodology, the assumptions about different types of claims, the systems used to record claims, and the accuracy of the calculations.

We also engaged an independent expert to consider the appropriateness of the Treasury’s risk-free discount rates and Consumer Price Index assumptions.

We reviewed the outcome of court cases during the year and considered the impact on the total outstanding claims liability.

There was an increase in the provision for sensitive claims against ACC of $3.6 billion relating to mental injuries, as set out in Schedule 3 of the Accident Compensation Act 2001.

In previous years, ACC recognised the liability from a claim for mental injury from the date the claimant received treatment. However, in December 2023, the Court of Appeal ruled that, for claimants who obtained cover for mental injury arising in terms of Schedule 3 of the Accident Compensation Act, the claim exists from the date of mental injury rather than the date of first treatment.

We were satisfied that ACC’s outstanding claims liability at 30 June 2024 was reasonable and that the disclosures were appropriate.

Entitlements under the Holidays Act 2003

The Government’s financial statements included a provision for employee entitlements of $2.4 billion for amounts owing to employees who were paid less than their legal entitlements under the Holidays Act 2003.

Why is this a key audit matter?

Applying the Holidays Act 2003 to complex employment arrangements, such as those with teachers and staff in the health sector, needs a good understanding of both the legislation and employees’ contractual terms. Judgement, negotiation, and agreement with employee representatives are needed to determine entitlements.

We included entitlements under the Holiday Act 2003 as a key audit matter because of the nature and effect on many public sector employees.

Our audit work

Health New Zealand – Te Whatu Ora and the Ministry of Education are most affected. These organisations had not finished determining the final amounts they owe to employees. Each had made an estimate based on a sample of former and current employees, applying assumptions and projecting the result over the affected employees.

We reviewed the changes in the provision since 2022/23 and considered the information and evidence used for the updated provision.

We were satisfied that the provision for entitlements under the Holidays Act 2003 at 30 June 2024 was reasonable.

The health sector

Of the $2.4 billion provision for Holidays Act 2003 entitlements included in the Government’s financial statements, $2 billion relates to employees and related project costs of Health New Zealand – Te Whatu Ora.

We evaluated whether the provision reflected the best information currently available to estimate the liability. We reviewed an update on the Health New Zealand – Te Whatu Ora Holidays Act Remediation Programme. We also reviewed an external expert’s work that compared updated remediation models (that reflect better quality data) to the recorded provision.

Health New Zealand – Te Whatu Ora had not completed determining the final amounts that it owes to all current and former employees, and there was uncertainty about the actual payments.

The payroll systems that Te Whatu Ora uses will be non-compliant until it has completed remediation.

The education sector

The Ministry of Education continued to assess its obligations to historic non-compliance with the Holidays Act 2003. The Ministry estimated that it owes $400 million to some school employees paid through the Ministry of Education. It revised the provision during the year to take account of a recently agreed framework for teachers’ annual holiday entitlements.

We obtained and reviewed an update on the Ministry’s Holidays Act compliance programme and reviewed its estimate of how much money it owes.

Because of progress on this matter during 2023/24, the Ministry’s estimate of the amount it owes was more reliable.

The Ministry of Education continues to assess its obligation to settle issues related to non-compliance with the Holiday Act 2003.

34: The key audit matters are described on pages 31-35 of the New Zealand Government (2024), Financial Statements of the Government of New Zealand for the year ended 30 June 2024, Wellington. We have provided further detail and explanation of our work, so the wording differs from that in the audit report to the financial statements.