Reporting Entity
The NZDF is a Government Department as defined by Section 2 of the Public Finance Act 1989.
Key assumptions underlying this forecast are:
- There will be no significant change in government policies or the NZDF’s agreement with the Minister of Defence. The implementation of this policy drives activity levels and costs, and is discussed in detail within the Statement of Intent.
- There will be no major changes in exchange rates.
- MOD prepayments reflect forecast payments for acquisition projects which have been approved by Cabinet. Should additional projects be approved during the year, there may be some payments for these projects during the year.
The 2007/08 forecast information will be updated as part of the government budget process. Although the forecast is based on the best information available, actual results for the year may vary from the forecast, and the variation may be material. Any operating surplus will generally be returned to the Crown in accordance with section 22 of the Public Finance Act 1989.
Significant Accounting Policies
The measurement base applied is historical cost modified by the revaluation of certain property, plant and equipment.
The accrual basis of accounting has been applied, except for cash flow information.
These financial statements are presented in New Zealand dollars rounded to the nearest thousand.
Budget Figures
The Budget figures are those presented in Budget Day Estimates of Appropriations (Main Estimates).
Judgements and Estimations
The preparation of financial statements in conformity with NZ IFRS requires judgements, estimations and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. 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 those 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 period if the revision affects both current and future periods.
Revenue
The NZDF derives revenue through the provision of outputs to the Crown, for services to third parties and interest on funds held in overseas bank accounts. This revenue is recognised when earned and is reported in the financial period to which it relates.
Cost Allocation
The NZDF has determined the cost of outputs using a cost allocation system that is outlined below. The system attributes costs either directly to outputs or uses an attribution method to allocate costs to outputs.
The costing model: 1
- traces the direct costs of a force element (for example, a squadron, a frigate, a battalion) directly to an appropriate output;
- attributes support unit costs to outputs using drivers that reflect the use of that activity to produce outputs; and
- attributes overhead costs 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 basis for allocation is set for the year. However, the allocation rules are reviewed if there is significant organisational change that is likely to alter the continued appropriateness of the rules.
Inventories
Inventories are not held for resale and are comprised mainly of munitions, technical spares in support of property, plant and equipment, and consumable items. Inventory intended to be kept for more than one year has been classified as non-current inventory. All other inventory has been classified as current inventory.
Inventories are recorded at weighted average cost. Appropriate allowance has been made for obsolescence. The obsolescence provision:
- includes specific provisions for obsolete inventory identified by considering the impact of any changes to capability, and by reviewing the high value inventory lines comprising the top 80% of inventory value;
- includes a general provision for low value inventory lines;
- includes amortisation of the value of contingency reserve stocks (CRS);
- excludes any inventory lines created within the last 2 years;
- excludes fuel, oil and lubricants which have a rapid turnover; and
- generally excludes ammunition, except for CRS amortisation or specifically identified issues.
Debtors and Receivables
Debtors and receivables are recorded at estimated net realisable value after providing for doubtful debts.
A provision for impairment of receivables is established when there is objective evidence that the NZDF will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted using the effective interest method.
Operating Leases
The NZDF leases training aircraft, office premises, office equipment (mainly multi-functional reprographic equipment), and computer software. As the lessor retains all the risks of ownership, these leases are classified as operating leases. Operating lease costs are expensed in the period in which they are incurred.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and deposits held at call with banks.
Property, Plant and Equipment (PPE)
Cost
PPE additions costing more than $5,000 are capitalised.
PPE is initially stated at cost. The initial cost comprises the purchase consideration and the costs directly attributable to bringing the asset to the location and working condition necessary for its intended use.
Valuation
Land and Buildings and Specialist Military Equipment (SME) are revalued to fair value, with the valuations being updated annually. PPE purchased within two years of the last valuation date are not revalued, and are stated at depreciated historical cost. PPE purchased before 1 January 1991 that have not been revalued are stated at an internal valuation as at 1 January 1991.
Valuations use a market-based approach where possible. Many building and SME assets are specialised in nature. Specialised assets are described as those assets that seldom, if ever, trade on the open market due to their specific purpose, design or locality. Where reliable market evidence is unavailable optimised depreciated replacement cost (ODRC) is used to calculate fair value.
Land is stated at fair value as determined by an independent registered valuer. Major land holdings are individually revalued to fair value using a market-based approach as determined by the valuer. Minor land holdings are revalued to fair value by the valuer confirming the appropriateness of rating valuations. The value of land has been discounted where necessary to allow for any possible restrictions on title or environmental issues associated with the land.
Buildings with a net book value greater than or equal to $0.250 million are revalued to fair value as determined by an independent registered valuer. Buildings with a net book value less than $0.250 million have had an appropriate market or construction cost based index applied to revalue them to fair value.
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 to an internally assessed valuation, undertaken by relevant experts within the NZDF, which is reviewed by an independent valuer. All other SME is stated at depreciated replacement cost based on an internal valuation or depreciated historical cost.
All other PPE is recorded at depreciated historical cost.
The results of revaluing PPE are credited or debited to an asset revaluation reserve for that class of asset.
Depreciation
Depreciation is charged on all PPE with the exception of freehold land and capital work in progress. Depreciation is provided on a straight-line basis so as to allocate the cost (or valuation) of the PPE, 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
- Specialist Military Equipment - 5-55 years
- Plant and Equipment - 5-50 years
- Office and Computer Equipment - 5-20 years
Intangible Assets
Software acquisition and development:
- Acquired computer software licences are capitalised on the basis of the cost incurred to acquire and bring to use the specific software.
- Costs associated with maintaining computer software are recognised as an expense when incurred. Costs that are directly associated with the development of software for internal use by the NZDF are recognised as an intangible asset. Direct costs include the software development employee costs and an appropriate portion of relevant overheads.
Properties Intended For Sale
Properties intended for sale and withdrawn from use are stated at the lower of their depreciated cost/valuation and net realisable value.
Provision for Employee Entitlements
Provision is made in respect of the NZDF’s liability for annual, long service and incentive leave and retirement benefits. Annual leave, sick leave and retirement benefits are recognised as they accrue to employees. Long service and incentive leave are recognised after qualifying conditions have been met. Annual leave has been calculated on an actual entitlement basis at current rates of pay. Long service and incentive leave and retirement benefits have been calculated on an actuarial basis, based on the present value of future entitlements.
Statement of Cash Flows
Cash means cash balances on hand and held in bank accounts.
Operating activities includes cash received from all NZDF income sources and 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 and/or surplus to, the Crown and cash flows associated with GST.
Foreign Currency
Transactions covered by short-term forward exchange contracts are translated at the exchange rate specified in those contracts. Other foreign currency transactions are converted to the New Zealand currency exchange rate ruling at the time of the transaction.
Monetary assets and liabilities in foreign currencies are translated at the closing mid-point exchange rate ruling at that date, except for those arising on the amount held in the Federal Reserve Bank account in the United States of America. Exchange differences arising on the translation of monetary assets and liabilities in foreign currencies are recognised in the Statement of Financial Performance except those that are covered by short-term forward exchange contracts.
The Federal Reserve Bank account holds deposits on account of procurements. Unrealised exchange variations are deferred and included in the cost of subsequent purchase transactions.
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. The NZDF enters into foreign currency forward exchange contracts to hedge foreign currency transactions. Any exposure to gains or losses on these contracts is generally offset by a related loss or gain on the item being hedged.
All financial instruments are recognised in the Statement of Financial Position except for foreign currency forward contracts. All revenue and expenses in relation to all financial instruments are recognised in the Statement of Financial Performance except for unrealised exchange variations on Federal Reserve Bank account transactions.
Goods and Services Tax (GST)
The financial statements 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 amount of GST owing to the Inland Revenue Department at balance date, being the difference between Output GST and Input GST, is included in Creditors and Payables in the Statement of Financial Position.
Taxation
Government Departments are exempt from payment of income tax in terms of the Income Tax Act 2004. Accordingly, no charge for income tax has been provided for. The NZDF is subject to fringe benefit tax and GST.
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 there are equally unperformed obligations.
Contingent Liabilities
Contingent liabilities are disclosed at the point at which the contingency is evident.
Taxpayers’ Funds and Capital Charge
Taxpayers’ Funds represents the Crown’s net investment in the NZDF.
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 ending 30 June 2008 is 7.5%.
Changes in Accounting Policies
There have been no changes in accounting policies, apart from those changes made under IFRS since the date of the last audited financial statements.
Note
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