Notes To The Financial Statements

for the Year Ended 30 June 2007

Variations from Budget

The final result for the year was a deficit of $85.968 million, compared with a budgeted deficit of $2.590 million. The six main factors causing this deficit are:

• A difference of $3.219 million in Revenue Crown between Actual and Supplementary Estimates which relates to the Multi Year Appropriation (MYA). NZDF has received funding for these overseas operations (a prepayment by the Crown), but has not incurred the expenses. This is reflected in the Statement of Financial Position as a current liability.
• Unbudgeted interest of $1.153 million. This is due mainly to Interest received on deferred settlement of Land.
• A Depreciation under-spend of $5.061 million due to delays in capitalisation of assets.
• An over-spend arising from the write down of $90.484 million of MoD Prepayments (see note 10). This is a non-cash, technical adjustment, and is due to the exchange rates applying as at 30 June 2007, in particular the strong NZ and US dollar cross rates.
• An under-spend of accumulated Air Combat Force disposal costs of $1.035 million.
• An unbudgeted Profit on sale of assets of $1.765 million.

Note 2: Crown Revenue

This is revenue earned for the supply of outputs to the Crown.

Note 5: Interest Revenue

Interest is earned on funds in various overseas bank accounts. In the 2006/07 financial year interest was also earned on settlement of the sale of land at Hobsonville.

Note 9: Capital Charge

The NZDF pays a capital charge to the Crown on its average Taxpayers’ Funds as at 30 June and 31 December each year. The capital charge rate for the year ended 30 June 2007 was 7.5% (2006 8.0%).

Note 11: Taxpayers’ Funds

Taxpayers funds comprises two components:

Note 13: Prepayments to Ministry of Defence

In 1994 the Ministers of Finance and Defence agreed to a prepayments regime relative to capital expenditure incurred by the Ministry of Defence from Vote Defence. With effect from 1 July 1994, and retrospectively for open projects, the NZDF reimburses the Ministry of Defence twice annually for costs incurred on capital projects. This has the effect of transferring non-departmental capital expenditure from the Ministry of Defence to prepayments in the NZDF Statement of Financial Position.

As at 30 June 2007 the reported prepayment of $663.840 million (2006 $433.497 million) remains uncapitalised

The Environmental provision relates to estimated costs of remedial work planned to be undertaken to address issues identified under the Resource Management Act. Costs are charged to the provision as work is completed.

Note 21: Financial Instruments

Credit Risk

Credit risk is the risk that a third party will default on its obligations to the NZDF, causing the NZDF to incur a loss.

In the normal course of its business, the NZDF incurs credit risk from trade debtors, and transactions with financial institutions and the New Zealand Debt Management Office (NZDMO). The NZDF does not require any collateral or security to support financial instruments with either the financial institutions that it deals with, or with the NZDMO, as these entities have high credit ratings.

The NZDF is party to Letters of Credit with Westpac Bank of $3.785 million (2006, $3.785 million).

Fair Value

With the exception of foreign currency forward contracts noted below, the fair value of all financial instruments is equivalent to the carrying amount disclosed in the Statement of Financial Position.

The fair value of foreign currency forward contracts based on NZDMO mid-point rates at balance date shows a net unrealised loss of $5.221 million (2006, gain of $4.796 million). These contracts are held as hedging transactions, undertaken to eliminate the risk of adverse exchange rates on the future costs of goods and services to be purchased in foreign currencies. In accordance with SSAP 21, recognition of the exchange differences on these hedging transactions has been deferred, and will be included in the measurement of the underlying purchase transactions as they fall due for settlement.

Currency Risk and Interest Rate Risk

Currency risk is the risk that balances denominated in foreign currency will fluctuate because of changes in foreign exchange rates.

The NZDF uses foreign exchange forward contracts to manage foreign exchange exposures. The notional principal amount outstanding at balance date on hedged purchase and sale commitments was $58.031 million (2006, $72.225 million).

Interest rate risk is the risk that the NZDF’s return on the funds it has invested will fluctuate due to changes in market interest rates. Under Section 46 of the Public Finance Act, the NZDF cannot raise a loan without Ministerial approval and no such loans have been raised. Accordingly, there is no interest rate exposure on funds borrowed.

The NZDF has no significant exposure to interest rate risk on its financial instruments.

Note 22: Related Party Information

The NZDF is a wholly owned entity of the Crown. The Government significantly influences the roles of the NZDF as well as being its major source of revenue.

Veterans’ Affairs New Zealand

Veterans’ Affairs New Zealand (VANZ) is a “semi-autonomous body” within the NZDF, and all the transactions, assets and liabilities of VANZ are included within these financial statements. The Office commenced operations on 12 April 1999. The Chief of Defence Force is responsible to the Minister of Veterans’ Affairs for the financial management of the Office under the Public Finance Act 1989. An Output Plan defines the relationship between the Minister of Veterans’ Affairs and the Chief of Defence Force. A formal delegation is in place from the Chief of Defence Force to the Director of Veterans’ Affairs. The NZDF provides VANZ with administration and infrastructural support as part of their day-to-day relationship.

Ministry of Social Development

The Ministry of Social Development (MSD) makes Defence Force allowance payments to NZDF personnel deployed overseas. The payments are made through the NZDF payroll systems on behalf of the MSD. The MSD then reimburses the NZDF. The amounts disbursed and reimbursed are disclosed in the Statement of Trust Monies.

Ministry of Defence

During the year the NZDF paid the Ministry of Defence $509.267 million (2006 $395.881 million) in relation to the prepayments arrangement referred to in Note 13. The NZDF made no purchases of goods and services from the Ministry of Defence (2006 nil). There was nothing owing to the Ministry of Defence as at 30 June 2007 (2006 nil). During the year the NZDF recovered Administrative and Project costs from the Ministry of Defence totalling $5.884 million (2006 $2.535 million). The amount outstanding as at 30 June 2007 was $1.580 million (2006 $1.580 million). NZDF reimbursed Ministry of Defence $0.364 million (2006 $0.225 million) for expenses the Ministry has incurred in capital acquisition projects prior to the decision on which asset to purchase. These pre-acquisition costs are expensed by the Ministry of Defence, as they do not meet the criteria for capitalisation.

Non-Public Funds

A number of non-public funds (NPFs) have been established under the Defence Act 1990 Section 58. These funds are established for the benefit of service personnel, and are specifically defined as not being public money under the Public Finance Act 1989. The beneficiaries of these NPFs are the members, who are the service personnel who contribute to them. NPFs include a wide range of entities such as sports and recreational funds, messes, unit funds, welfare funds, clubs for ranks, accommodation funds, and benevolent funds. It is estimated that NPFs have

• Net Assets of $37.3 million.
• Annual revenue of $3.0 million
• Annual expenditure of $2.5 million

NPFs, by their nature, have a close relationship with the NZDF, and contribute to the well-being and esprit de corps of armed forces personnel. These funds are established under Section 58 of the Defence Act 1990, and governance arrangements are generally established under Defence Force Orders issued by the Chief of Defence Force or Service Chiefs. This often includes NZDF representation on the governing bodies of the funds. The NZDF provides support to NPFs in the form of administrative support and facilities, for which no charge is made. There are no other transactions with NPFs.

Service Museums

The NZDF has close links with the Service Museums for the Army, Navy and Air Force. The Service Museums are independent entities established by trust deed. NZDF is represented on the governing bodies of these entities.

The NZDF provides support to Service Museums in the form of payment of some operating costs and provision of administrative support and facilities, for which no charge is made.

It is estimated that Service Museums have

• Net Assets of $10.1 million (excluding value of collection assets which are not recorded in the Museums Statements of Financial Position).
• Annual revenue of $1.6 million
• Annual expenditure of $1.7 million

The results of the Service Museums are currently disclosed by way of a note in the NZDF annual report. The NZDF is reviewing its Service Museum relationships and reporting regime to improve alignment with IFRS.

Armed Forces Canteen Council

The NZDF has a close working relationship with the Armed Forces Canteen Council (AFCC), which is an independent body established under the Armed Forces Canteens Act 1948, which includes members of the NZDF serving as part of the Council and Board of Management of the AFCC.

The mission of the AFCC is to be the preferred provider of retailing and cafeteria services on all NZDF camps and bases and to further benefit those personnel associated with the NZDF through the distribution of profits. The AFCC has trading outlets at all the major camps and bases. The NZDF provides facilities to AFCC to conduct its operations in accordance with Defence Force Order 16/1995.

Other

The NZDF enters into numerous transactions with other government departments, Crown agencies and state-owned enterprises on an arm’s length basis. Where those parties are acting in the course of their normal dealings with the NZDF, related party disclosures have not been made for transactions of this nature.

Apart from those transactions described above, the NZDF has not entered into any related party transactions.

The remuneration figures below comprise base salary, superannuation subsidies, motor vehicle entitlements and other benefits for employees. The remuneration figures also include terminal benefits where applicable.

Please use this pdf file to print this page.

• Print format - Notes To The Financial Statements [pdf - 166 kb]

Previous |  Contents | Next