Statement of Intent 2007-2010 - Part Three: Financial information
Statement of underlying assumptions
These forecast financial statements and the forecast statement of service performance have been compiled on the basis of government policies and the interim outcome of negotiations between the Ministry of Research, Science and Technology and the Minister of Research, Science and Technology on the output agreement for 2007/2008, at the time the statements were finalised.
These forecast financial statements comply with generally accepted accounting practice, as recommended by the Institute of Chartered Accountants of New Zealand. The measurement base applied is historical cost. The accruals basis of accounting has been used for the preparation of these statements.
These forecast financial statements have been prepared on a going concern basis.
The forecast financial statements in this report present expenses (and revenue) exclusive of GST, in accordance with New Zealand Equivalents to the International Financial Reporting Standards (IFRS).
Statement of accounting policies for the year ending 30 June 2008
The Ministry of Research, Science and Technology is a government department as defined by the Public Finance Act 1989. The Ministry was established on 1 October 1989 and commenced effective operations in December 1989.
The Ministry considers itself a public benefit entity for the purposes of New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS).
Reporting period
The reporting period for these forecast financial statements is the year ended 30 June 2008.
The Budget forecast is the original forecast for the financial year, as presented in the 2006 Budget on 18 May 2006 through the Estimates of Appropriation 2006/2007 (identified as ‘Main Estimates’), and is further amended by the Supplementary Estimates of Appropriation 2006/2007 and any transfer made by Order of Council under the Public Finance Act 1989. The latter is identified as ‘Supplementary Estimates’.
The estimated actual forecast, as presented in the 2007 Budget on 17 May 2007, has been prepared using actual data up to 28 February 2007, and forecast data for the remainder of the financial year.
Statement of compliance
These forecast financial statements have been prepared in accordance with New Zealand generally accepted accounting practice. They comply with NZ IFRS, and other applicable financial reporting standards, as appropriate for public benefit entities. These are the Ministry’s first consolidated financial statements complying with NZ IFRS and NZ IFRS 1 has been applied.
Accounting policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing an opening NZ IFRS balance sheet as at 1 July 2006 for the purposes of the transition to NZ IFRS.
Measurement system
The measurement base applied is historical cost modified by the revaluation of certain assets and liabilities as identified in this statement of accounting policies.
The accrual basis of accounting has been used unless otherwise stated. These financial statements are presented in New Zealand dollars rounded to the nearest thousand.
Judgements and estimations
The preparation of financial statements in conformity with NZ IFRS requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses2. 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 estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Judgements that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in footnote 6.
Revenue
The Ministry derives revenue through the provision of outputs to the Crown and for services to third parties. Such revenue is recognised when earned and is reported in the financial period to which it relates.
Expense
The Ministry incurs expenses through the provision of outputs to the Crown and for services to third parties. Such expenses are recognised when incurred, are matched to revenue and are reported in the financial period to which they relate.
Cost allocation
The Ministry derives the costs of outputs using the cost allocation system outlined below:
- Direct costs assigned to outputs – direct costs are charged directly to outputs.
- Allocating indirect and corporate costs to outputs – indirect costs (including personnel directly applied but whose cost is pooled) are allocated by a proportion of budgeted direct staff time for each output.
(Note: ‘Direct costs’ are those costs directly assigned to an output. ‘Indirect costs’ are those costs that cannot be identified in an economically feasible manner with a specific output. Corporate costs are all costs incurred by the Ministry’s service and support units.)
Debtors and receivables
Debtors and receivables are recorded at estimated realisable value after providing for doubtful debts or impairment.
Operating leases
Operating leases, where the lessor substantially retains the risks and rewards of ownership, are recognised in a systematic manner over the term of the lease. Leasehold improvements are capitalised and the cost is amortised over the unexpired period of the lease or the estimated useful life of the improvements, whichever is shorter. Lease incentives received are recognised evenly over the term of the lease as a reduction in rental expense.
Property, plant and equipment
Owned Assets
Property, plant and equipment costing $1,500 or more have been capitalised and stated at cost, less accumulated depreciation and impairment losses. The cost of fit-out and other self-constructed assets includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads.
Where material parts of an item of property, plant or equipment have different useful lives, they are accounted for as separate items of property, plant or equipment.
Leased Assets
Leases where the Ministry would assume substantially all the risks and rewards of ownership are classified as finance leases. Where the holding of such leases has approval of the Minister of Finance, the assets acquired by way of finance lease are stated at an amount equal to their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses.
Subsequent Costs
Subsequent costs are added to the carrying amount of an item of property, plant and equipment when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Ministry and the cost of the item can be measured reliably. All other costs are recognised in the Operating Statement (Statement of Financial Performance) as an expense when incurred.
Depreciation
Depreciation of property, plant and equipment has been provided on a straight-line basis so as to allocate the cost of assets to the estimated residual value over their useful lives. In addition, these assets may be adjusted in value through revaluation or impairment. The rates of depreciation to be used for 2007/2008 are:
- Computer equipment – 33.3 percent;
- Office equipment and furniture – 20 percent; and
- Office fit-out – spread over the unexpired portion of the accommodation lease.
(Note: Computer equipment excludes software. Software is considered an intangible asset as the enduring benefit is linked to a usage entitlement conferred by third party provided licence.)
Software Acquisition And Development
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring the specific software to use. Costs associated with maintaining computer software are recognised as an expense when incurred.
The cost of internally generated software represents expenditure incurred in the development phase of the asset only. The development phase occurs after the following can be demonstrated: technical feasibility; ability to complete the asset; intention and ability to sell or use; and development expenditure can be reliably measured. Expenditure incurred on research3 of an internally generated intangible asset is expensed when it is incurred. Where the research phase cannot be distinguished from the development phase, the expenditure is expensed when it is incurred.
The cost of development of the Ministry’s websites, where such development is for the provision of information only, is not recognised as an intangible asset and is accordingly expensed through the Operating Statement (Operating Statement (Statement of Financial Performance)).
Amortisation Of Software Entitlements
Amortisation of software has been provided on a straight-line basis so as to allocate the cost of software entitlements over their respective licence period or useful life. The amortisation charge for each period is recognised in the Operating Statement (Statement of Financial Performance). The useful lives and associated amortisation rates of software have been estimated as follows: Computer software – 33.3 percent.
Impairment
The carrying amounts of the Ministry’s assets other than inventories are reviewed at each balance date to determine whether there is any indication of impairment. If any such indication exists, the assets recoverable amount is estimated. If the estimated recoverable amount of an asset is less than its carrying amount, the asset is written down to its estimated recoverable amount and an impairment loss is recognised in the Operating Statement (Statement of Financial Performance).
- Estimated recoverable amount of investments and receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at their original effective interest rate. Receivables with a short duration are not discounted.
- Estimated recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. Value in use is determined by estimating future cash flows from the use and ultimate disposal of the asset and discounting these to their present value using a discount rate that reflects current market rates and the risks specific to the asset.
Employee Entitlements
Annual leave is recognised as it accrues to employees on an entitlement basis at current rates of pay. Sick leave is recognised as it accrues to employees where they exceed entitlement at current rates of pay. Long service leave will be recognised on an actuarial basis based on the present value of expected future entitlements.
Statement Of Cash Flow
Cash means cash balances on hand and held in bank accounts.
Operating activities include cash received from all income sources of the Ministry and record the cash payments made for the supply of goods and services.
Investing activities are those activities relating to the acquisition and disposal of non-current assets.
Financing activities comprise capital injections by, or repayment of capital to, the Crown.
Financial Instruments
Designation of financial assets and financial liabilities by individual entities into instrument categories is determined by the business purpose of the financial instruments, policies and practices for their management, their relationship with other instruments and the reporting costs and benefits associated with each designation. The designations applied by entities are reflected in the financial statements of the Government (after making necessary consolidation adjustments)4.
Financial Assets
Financial assets held for trading and financial assets designated at fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the Operating Statement (Statement of Financial Performance). A financial asset is designated at fair value through profit and loss if acquired principally for the purpose of selling in the short term. It may also be designated into this category if the accounting treatment results in more relevant information because it either significantly reduces an accounting mismatch with related liabilities or is part of a group of financial assets that is managed and evaluated on a fair value basis. Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the Operating Statement (Statement of Financial Performance). Transaction costs are expensed as they are incurred.
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. Available-for-sale financial assets are initially recorded at fair value plus transaction costs. They are subsequently recorded at fair value with any resultant fair value gains or losses recognised directly in equity except for impairment losses, any interest calculated using the effective interest method and, in the case of monetary items (e.g. debt securities), foreign exchange gains and losses resulting from translation differences due to changes in amortised cost of the asset. These latter items are recognised in the Operating Statement (Statement of Financial Performance). For non-monetary available-for-sale financial assets (e.g. equity instruments) the fair value movements recognised in equity include any related foreign exchange component. At derecognition, the cumulative fair value gain or loss previously recognised directly in equity is recognised in the Operating Statement (Statement of Financial Performance).
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method (refer interest revenue policy). Loans and receivables issued with a duration of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired. Interest, impairment losses and foreign exchange gains and losses are recognised in the Operating Statement (Statement of Financial Performance).
Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with a maturity of no more than three months from date of acquisition.
Fair values of quoted investments are based on current bid prices. Regular way purchases and sales of all financial assets are accounted for at trade date5 . If the market for a financial asset is not active, fair values for initial recognition and, where appropriate, subsequent measurement are established by using valuation techniques. At each balance date, an assessment is made as to whether there is objective evidence that a financial asset or group of financial assets is impaired.
Financial Liabilities
Financial liabilities held for trading and financial liabilities designated at fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the Operating Statement (Statement of Financial Performance). A financial liability is designated at fair value through profit and loss if acquired principally for the purpose of selling in the short term. It may also be designated into this category if the accounting treatment results in more relevant information because it either significantly reduces an accounting mismatch with related assets or is part of a group of financial liabilities that is managed and evaluated on a fair value basis. Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the Operating Statement (Statement of Financial Performance). Transaction costs are expensed as they are incurred.
Other financial liabilities are recognised initially at fair value less transaction costs and subsequently measured at amortised cost using the effective interest rate method (see interest expense policy). Financial liabilities entered into with a duration of less than 12 months are recognised at their nominal value. Amortisation and, in the case of monetary items, foreign exchange gains and losses, are recognised in the Operating Statement (Statement of Financial Performance) as is any gain or loss when the liability is derecognised. Currency issued for circulation, including demonetised currency, is recognised at face value. Currency issued represents a liability in favour of the holder.
Derivatives
Derivative financial instruments are recognised both initially and subsequently at fair value. They are reported as either assets or liabilities depending on whether the derivative is in a net gain or net loss position respectively. Recognition of the movements in the value of derivatives depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged (see Hedging).
Derivatives that are not designated as for hedge accounting are classified as held-for-trading financial instruments with fair value gains or losses recognised in the Operating Statement (Statement of Financial Performance). Such derivatives may be entered into for risk management purposes, although not formally designated for hedge accounting, or for tactical trading. The underlying intent of the derivative influences where gains and losses are reported in the Operating Statement (Statement of Financial Performance)6 .
Hedging
The Ministry will apply hedge accounting after considering the costs and benefits of adopting hedge accounting, including whether an economic hedge exists and the effectiveness of that hedge, whether the hedge accounting qualifications could be met, and the extent it would improve the relevance of reported results.
Transactions between entities within the Ministry do not qualify for hedge accounting in the financial statements of the Government (although they may qualify for hedge accounting in the separate financial statements of the individual entities). Where a derivative is used to hedge the foreign exchange exposure of a monetary asset or liability, the effects of the hedge relationship are automatically reflected in the Operating Statement (Statement of Financial Performance) so hedge accounting is not necessary.
(a) Cash flow hedge
Where a derivative qualifies as a hedge of variability in asset or liability cash flows (cash flow hedge), the effective part of any gain or loss on the derivative is recognised in equity while the ineffective part is recognised in the Operating Statement (Statement of Financial Performance). Where the hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability (e.g. where the hedge relates to purchase of an asset in a foreign currency), the amount recognised directly in equity is included in the initial cost of the asset or liability. Otherwise, gains or losses recognised in equity transfer to the Operating Statement (Statement of Financial Performance) in the same periods as when the hedged item affects the Operating Statement (Statement of Financial Performance) (e.g. when the forecast sale occurs). Both effective and ineffective parts of the hedge are recognised in the same area of the Operating Statement (Statement of Financial Performance) as the hedged item7 .
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the Operating Statement (Statement of Financial Performance). When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred to the Operating Statement (Statement of Financial Performance).
(b) Fair value hedge
Where a derivative qualifies as a hedge of the exposure to changes in fair value of an asset or liability (fair value hedge), any gain or loss on the derivative is recognised in the Operating Statement (Statement of Financial Performance) together with any changes in the fair value of the hedged asset or liability. The carrying amount of the hedged item is adjusted by the fair value gain or loss on the hedged item in respect of the risk being hedged. Both effective and ineffective parts of the hedge are recognised in the same area of the Operating Statement (Statement of Financial Performance) as the hedged item.
Commitments
Future expenses and liabilities to be incurred on contracts that have been entered into at balance date are disclosed as commitments to the extent that they are equally unperformed obligations. Commitments relating to employment contracts are not disclosed.
Contingent liabilities
Contingent liabilities are disclosed at the point at which the contingency is evident.
Related parties
The Ministry is a wholly owned entity of the Crown. The Government significantly influences the roles of the Ministry, as well as being its major source of revenue. The Ministry enters into numerous transactions with other government departments, Crown agencies and State Owned Enterprises on an arm’s length basis. These transactions are not considered to be related party transactions.
The remuneration and other benefits obtained by the senior management of the Ministry is disclosed through the notes to the financial statements.
Goods and Services Tax
The Forecast Operating Statement and Forecast of Cash Flows Statement are exclusive of GST. The Forecast Balance Sheet is also exclusive of GST, except for Creditors and Payables and Debtors and Receivables, which are GST inclusive.
The potential amount of GST owing to or from the Inland Revenue Department at balance date, being the difference between Output GST and Input GST, is included in Creditors and Payables or Debtors and Receivables (as appropriate).
Taxation
The Ministry of Research, Science and Technology is exempt from the payment of income tax in terms of the Income Tax Act 2004. Accordingly, no charge for income tax has been provided for.
Taxpayers’ funds
This is the Crown’s net investment in the Ministry.
Changes in accounting policies
Accounting policies are changed only if the change is required by a standard or interpretation or otherwise provides more reliable and more relevant information. 8
Transition to NZ IFRS
The Ministry’s financial statements for the year ended 30 June 2008 will be the first financial statements that comply with NZ IFRS. The Ministry has applied NZ IFRS 1 in preparing these financial statements. The Ministry’s transition date is 1 July 2006, having prepared its opening NZ IFRS balance sheet at that date. The reporting date of these financial statements is 30 June 2008. The NZ IFRS adoption date is 1 July 2007.
The Ministry has elected not to apply any optional exemptions from full retrospective application available under NZ IFRS 1 in preparing these financial statements.
Footnotes
Where material, information on the major assumptions is provided in the relevant accounting policy or will be provided in the relevant note.
Research is “original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding”.
There is no policy for ‘held-to-maturity’ instruments as there is a rebuttable presumption that the held-to-maturity designation will not be used due to the risks and consequences of tainting. Entities need to discuss with Treasury any proposals to use the held-to-maturity designation in their reporting to the Crown.
Regular way’ transactions are those under a contract whose terms require delivery within the time frame established by regulation or marketplace convention.
The guidance in NZ IFRS 7 is unclear where gains/losses on derivatives held for trading should be refl ected in the Statement of Financial Performance. Initial advice, and our working assumption, indicates that if entered into for economic hedging (but are not hedge accounted) net gains/losses will be allocated to the part of the statement as the economically hedged item e.g. if to hedge a sales transaction, then it will be included in sales of goods and services. If used for tactical trading, net gains/losses are part of financial income.
The guidance in NZ IFRS 7 is unclear where the ineffective part of a hedge should be refl ected in the Statement of Financial Performance. Initial advice, and our working assumption, indicates that it should also be allocated to the part of the statement as the hedged item.
When appropriate the following would be added: “There have been no changes in accounting policies. All policies have been applied on a basis consistent with the previous year.”