- for the Year Ended 30 June 2009
Reporting Entity
The New Zealand Defence Force is a Government Department as defined by Section 2 of the Public Finance Act 1989 and is domiciled in New Zealand.
The primary objective of the New Zealand Defence Force is to provide services to the public rather than making a financial return. Accordingly, the New Zealand Defence Force has designated itself as a public benefit entity for the purposes of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).
The financial statements of the New Zealand Defence Force are for the year ended 30 June 2009. The financial statements were authorised for issue by the Chief of Defence Force on 20 August 2009.
In addition, the financial statements include information on the Crown activities that the NZDF administers on behalf of Vote: Veterans’ Affairs – Defence.
In these financial statements the New Zealand Defence Force is also referred to as the NZDF.
Basis of Preparation
The financial statements of the New Zealand Defence Force have been prepared in accordance with the requirements of the Public Finance Act 1989, which includes the requirement to comply with New Zealand generally accepted accounting practices (NZ GAAP).
These financial statements have been prepared in accordance with, and comply with NZ IFRS as appropriate for public benefit entities.
The financial statements have been prepared on a historical cost basis, modified by the revaluation of land, buildings, specialist military equipment and certain financial instruments including derivative instruments.
The financial statements are presented in New Zealand dollars, which is the NZDF’s functional currency and all values are rounded to the nearest thousand dollars ($’000).
Use of Accounting Estimates and Judgements
The preparation of financial statements requires the use of certain accounting estimates. It also requires the NZDF to exercise judgement in the process of applying the NZDF’s accounting policies. Accounting estimates and judgements are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Any area involving a high degree of judgement or complexity or where accounting estimates are significant to the financial statements are disclosed under the applicable accounting policies below.
Accounting Policies
The following particular accounting policies which materially affect the measurement of financial results and financial position have been applied.
Budget Figures
The Budget figures are those presented in Budget Night Estimates (Main Estimates). The Supplementary Estimates figures are the Budget Night Estimates of Appropriation as amended by the Supplementary Estimates. The appropriation figures include transfers made under Section 26A and increases under Section 26B of the Public Finance Act 1989.
Revenue
The NZDF derives revenue through the provision of outputs to the Crown and for services to third parties. Revenue is measured at the fair value of consideration received. This revenue is recognised when earned and is reported in the financial period to which it relates.
Interest
The NZDF derives interest income on funds held in overseas bank accounts and is recognised using the effective interest method.
Operating 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.
The NZDF leases training aircraft, office premises and office equipment (mainly multi-functional, reprographic equipment). As the lessor retains all the risks of ownership, these leases are classified as operating leases.
Goods and Services Tax (GST)
The financial statements and schedules are prepared on a GST exclusive basis except for Debtors and Receivables and Creditors and Payables in the Statement of Financial Position, which are GST inclusive.
The net amount of GST recoverable from, or payable to the Inland Revenue Department (IRD) is included as part of the 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
Government departments are exempt from income tax as public authorities. Accordingly no charge for income tax has been provided for.
Taxpayers’ Funds
Taxpayers’ funds are the Crown’s investment in the NZDF and are measured as the difference between total assets and total liabilities.
Taxpayers’ funds is disaggregated and classified as general funds and property, plant and equipment revaluation reserves.
Cash and Cash Equivalents
Cash means cash balances on hand and funds on deposit with banks.
Debtors and Receivables
Debtors and other receivables are recorded at their fair value after providing for impairment. Impairment of a receivable is established when there is objective evidence that the NZDF will not be able to collect amounts due according to the original terms of the receivable.
Inventories
Inventories are held for distribution or consumption in the provision of services and are comprised of munitions, technical spares and consumable items.
Inventory intended to be kept for more than one year has been classified as non-current inventory. No inventory is pledged as security for liabilities.
Inventories are recorded at weighted average cost and the total value of inventory reflects any obsolescence or other impairment.
The obsolescence provision is calculated by identifying specific obsolete inventory items and slow moving inventory lines.
Property, Plant and Equipment
Property, plant and equipment (PPE) consists of land, buildings, leasehold improvements, specialist military equipment, plant and equipment, office and computer (hardware) equipment.
PPE is shown at cost or valuation less accumulated depreciation and accumulated impairment losses.
Individual assets, or groups of assets, are capitalised if their cost is greater than $5,000. The value of an individual asset that is less than $5,000 and is part of a group of similar assets is capitalised.
Additions
The cost of an item of property, plant and equipment is recognised as an asset if, and only if, it is probable that future economic benefits or service potential will flow to the NZDF and the cost of the item can be measured reliably.
Disposals
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of the asset. Gains and losses on disposal are included in the Statement of Financial Performance. When a revalued asset is sold, the amount included in the property, plant and equipment revaluation reserve in respect of the asset is transferred to general funds.
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 NZDF and the cost of the item can be measured reliably.
Revaluation
Land, buildings and specialist military equipment asset classes are subject to revaluation with sufficient regularity to ensure that the carrying amount does not differ materially from fair value and at least once every five years. Valuations use a market based approach except where reliable market evidence is unavailable and then optimised depreciated replacement cost (ODRC) is used to calculate fair value. The carrying values of revalued items are reviewed at each balance date to ensure that those values are not materially different to fair value.
Major land holdings are individually revalued using a market-based approach. Minor land holdings are revalued based on the rating valuations.
Buildings with a net book value greater than or equal to $0.250 million are individually revalued. Buildings with a net book value of less than $0.250 million are revalued using an appropriate market or construction cost based index.
Specialist military equipment (SME) with a net carrying value of $2 million or more, or groups of like assets with a total carrying value of $4 million or more are revalued annually using an internally assessed valuation. All other SME is stated at depreciated replacement cost based on a historic internal valuation or depreciated historical cost.
Valuations for land and buildings are determined by an independent registered valuer. The internally assessed valuation for SME is reviewed by the independent registered valuer.
Revaluation gains and losses on disposal are included in the Statement of Financial Performance and are determined by comparing the proceeds from the disposal with the carrying value. When a revalued asset is sold, the amount included in the property, plant and equipment revaluation reserve in respect of the asset is transferred to general funds.
Depreciation
Depreciation is provided on a straight line basis on all PPE except freehold land and capital work in progress so as to allocate the cost, or valuation, of the assets, less any estimated residual value, over their estimated economic useful lives. The estimated economic useful lives are within the following ranges:
| Buildings |
5 - 100 years |
| Leasehold improvements |
2 - 20 years |
| Specialist Military Equipment |
5 - 55 years |
| Plant and Equipment |
5 - 50 years |
| Office and Computer Equipment |
2 - 20 years |
Leasehold improvements are depreciated over the unexpired period of the lease or the estimated remaining useful life of the improvements, whichever is shorter.
Intangible Assets
Computer application software with a finite useful live costing more than $5,000 is capitalised and recorded at cost less accumulated amortisation. Costs associated with maintaining computer software are recognised as an expense when incurred.
Amortisation is charged to the Statement of Financial Performance on a straight-line basis over the useful life of the asset. The estimated economic useful life for computer application software is 3 - 20 years.
Employee Entitlements
A provision is made in respect of the NZDF’s liability for annual, long service, incentive leave, civilian sick leave and retirement benefits. Annual leave has been calculated on an actual entitlement basis at current rates of pay. Long service, incentive leave and retirement benefits have been calculated on an actuarial basis, based on the estimated present value of future entitlements.
ACC Accredited Employer Programme
The NZDF is an ACC Accredited Employer under the full self cover option. The NZDF manages ACC claims for work related injuries until the claim is closed or for a period of 48 months following the year in which the claim was registered. At the end of this period any open claims still requiring entitlements are handed back to ACC for management together with the life time cost of these claims. ACC calculates the life time cost of open claims at hand back. The NZDF liability for these claims ceases at this point.
The liability for ACC claims is measured as the expected future payments to be made for claims already registered up to the reporting date.
Superannuation
Obligations for contributions to the State Sector Retirement Savings Scheme, KiwiSaver, Government Superannuation Fund, Armed Forces Superannuation Scheme and Civil Staff Superannuation Scheme are accounted for as defined contribution schemes and are recognised as an expense in the Statement of Financial Performance as incurred.
Foreign Currency
Foreign currency transactions are converted to the New Zealand currency exchange rate prevailing at the date of the transaction.
Monetary assets and liabilities in foreign currencies at balance date are translated at the closing mid-point exchange rate prevailing at that date.
Gains and losses resulting from foreign currency transactions are recognised in the Statement of Financial Performance.
Financial Instruments
The NZDF is party to financial instruments as part of its normal operations. These financial instruments include cash balances, receivables, payables and foreign currency forward exchange contracts.
All financial instruments are recognised in the Statement of Financial Position. All revenue and expenses in relation to all financial instruments are recognised in the Statement of Financial Performance.
Statement of Cost Accounting Policies
The NZDF has determined the cost of outputs using the cost allocation system outlined below.
Vote: Defence Force
Direct costs of a force element (for example, a squadron, a frigate, a battalion) are attributed directly to an appropriate output.
Support unit costs are charged to outputs using long term drivers that reflect the use of that activity to produce outputs. Drivers for support units include:
- Planned maintenance and sea-days (Outputs 2 - 6),
- Personnel numbers directly related to the force elements (Outputs 7 - 10), and
- Maintenance and logistic support for aircraft fleets (Outputs 11 - 14).
- Overhead costs are charged to outputs using the percentage of that output’s gross operating budget (exclusive of capital charge) to the total gross budget (exclusive of capital charge) for all outputs.
The allocation rules are reviewed if there is significant organisational change to alter the continued appropriateness of the rules.
Vote: Veterans’ Affairs – Defence Force
All costs associated with the delivery of outputs are attributed directly to the appropriate output.
There have been no changes in the cost accounting methodology during the financial year.
Commitments
Future expenses to be incurred on contracts that have been entered into at balance date are disclosed as commitments to the extent that there are equally unperformed obligations.
Cancellable commitments that have a penalty or exit cost 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.
Contingent Liabilities
Contingent liabilities are disclosed at the point at which the contingency is evident.
Capital Management Plan
The NZDF’s capital is its equity, which is comprised of general taxpayers’ funds and revaluation reserves. Equity is represented by net assets.
The NZDF manages its revenues, expenses, assets, liabilities and general financial dealings prudently. The NZDF’s equity is largely managed as a by-product of managing income, expenses, assets, liabilities and in compliance with Government Budget processes and with Treasury Instructions.
Although the NZDF is more asset intensive than most Government departments, this is managed using robust systems, policies, the Capability Management Framework and the resultant Long-Term Development Plan.
The objective of managing the NZDF’s equity is to ensure the NZDF effectively achieves its strategic goals and objectives for which it has been established, whilst remaining a going concern.
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