Departmental financial statements

Statement of accounting policies

Reporting entity

Inland Revenue is a government department as defined by the Public Finance Act 1989. These are the financial statements of Inland Revenue prepared pursuant to the Public Finance Act 1989.

Measurement system

These financial statements have been prepared on a historical cost basis unless otherwise stated. In line with the Statement of Concepts, an asset is recognised in the Statement of Financial Position only when it is probable that the future economic benefits will fl ow to the entity and the asset has a value that can be measured reliably.

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 the Main Estimates and those amended by the Supplementary Estimates and transfers made by Order in Council under the Public Finance Act 1989.

Revenue

Inland Revenue derives revenue through the provision of outputs to the Crown, other government departments, and for services to third parties. Such revenue is recognised when earned and is reported in the financial year it relates to.

Cost allocations

Inland Revenue uses an integrated cost allocation process to derive the cost of its outputs. This process involves the initial costing of business processes, followed by the full costing of outputs. Business processes represent the key functional activities within the department. These business processes are used to capture direct costs.

Direct personnel costs are charged to business processes, based on actual hours and standard activity rates. Other related direct costs, including depreciation, are allocated to business processes, based on actual hours and relevant activity drivers. Premises costs are charged to business processes based on a combined floor space and actual hours allocation.

Business process costs are allocated to outputs, based on specific historical activity drivers for each business process. Indirect information technology costs are assigned to specific service categories and allocated to outputs based on system usage drivers.

Other indirect costs and corporate overheads that cannot be directly attributed to a business process are apportioned to outputs, based on planned business process activity allocations to outputs.

Debtors and receivables

Receivables are recorded at estimated realisable value, after providing for doubtful and uncollectable debts.

Leases

Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased items are classified as operating leases. Inland Revenue leases office premises, computer hardware and office equipment. Inland Revenue has no leases classified as finance leases.

Fixed assets

The cost of a fixed asset is the value of consideration given to acquire or create the asset, and any directly attributable costs of bringing the asset to working condition for its intended use. The capitalisation thresholds are:

Computers	All
Software - developed	$50,000 and over
Software - purchased	$5,000 and over
Set-up of a new site or activity	$20,000 and over
Other assets	$2,000 and over
Grouped assets	$20,000 and over

Any write-down of an item to its recoverable amount is recognised in the Statement of Financial Performance.

Assets under construction represent the costs of assets under development. The cost comprises direct labour, material purchased and overheads, if appropriate. There are currently two categories:

Leasehold improvements
Software/IT equipment

Depreciation

Depreciation is provided on a straight-line basis on all fixed assets, other than assets under construction. The rates of depreciation will write off the cost of the assets to the estimated residual value over the useful life of the assets.

The useful lives of major classes of assets have been estimated as follows:

Motor vehicles	5 years
IT equipment	3 - 5 years
Office equipment	5 years
Furniture	7 years
Leasehold improvements	1 - 7 years
Software	5 - 7 years

All fixed assets, other than motor vehicles, are assumed to have no residual value. Motor vehicles are assumed to have a 30% residual value.

The cost of leasehold improvements is capitalised and depreciated over the unexpired period of the lease, or the estimated remaining useful lives of the improvements, whichever is shorter.

Assets under construction are not depreciated. The total cost of a capital project is transferred to the appropriate asset class on its completion and then depreciated.

Employee entitlements

Provision is made for Inland Revenue's liability for annual, longservice and retirement leave, and time off in lieu. Annual leave, time off in lieu and other entitlements, that are expected to be settled within 12 months of reporting date, are measured at nominal values on an actual entitlement basis at current rates of pay.

Entitlements that are payable beyond 12 months, such as long-service leave and retiring leave, have been calculated on an actuarial basis, based on the present value of expected future entitlements.

Statement of Cash Flows

Cash means cash balances on hand, and held in bank accounts. Operating activities include cash received from all income sources of Inland Revenue, 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.

Foreign currency

Foreign currency transactions are converted into New Zealand dollars at the exchange rate at the date of the transaction. Where a foreign currency forward exchange contract has been used to establish the price of a transaction, the forward rate specified in that foreign exchange contract is used to convert that transaction to New Zealand dollars. Consequently, no exchange gain or loss resulting from the difference between the forward exchange contract rate and the spot exchange rate on date of settlement is recognised.

Financial instruments

Inland Revenue is party to financial instruments as part of its normal operations. These financial instruments include bank accounts, debtors, creditors and foreign currency forward exchange contracts. Inland Revenue enters into the foreign currency forward exchange contracts to hedge currency transactions. Apart from foreign currency forward exchange contracts, all financial instruments are recognised in the Statement of Financial Position and all revenues and expenses in relation to financial instruments are recognised in the Statement of Financial Performance. Except for those items covered by a separate accounting policy, all financial instruments are shown at their estimated fair values.

Goods and services tax (GST)

The Statement of Unappropriated Expenses and Capital Expenditure and the Statement of Appropriations are GST-exclusive. The Statement of Financial Position is GST-exclusive, except for creditors and payables, and debtors and receivables, which are GST-inclusive. All other financial statements and notes are GST-exclusive.

The amount of GST owing to or from Inland Revenue 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

Government departments are exempt from the payment of income tax in terms of the Income Tax Act 1994. Accordingly, no charge for income tax has been provided for.

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.

Contingent liabilities

Departmental contingent liabilities are recognised in the Statement of Contingent Liabilities at the point at which the contingency is evident.

Taxpayers' funds

This is the Crown's net investment in Inland Revenue.

Comparatives

Certain comparative information has been reclassified to conform with the current year's presentation.

Changes in accounting policies

There have been no changes in accounting policies and cost allocation policies since the date of the last audited financial statements. All policies have been applied on a basis consistent with the previous year.

Adoption of New Zealand equivalents to international financial reporting standards

In August 2003, the Government announced that the Crown would apply New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) in the preparation of its financial statements from Budget 2007. To comply with this decision, Inland Revenue will apply NZ IFRS in the preparation of financial statements for the year ending 30 June 2008. Inland Revenue will be collecting NZ IFRS information throughout 2006-07 as part of the transition to NZ IFRS. This information will be used to provide the comparative NZ IFRS information to be reported in the 2007-08 financial statements.

In preparation for the adoption of NZ IFRS, Inland Revenue has formed a project team and sought independent external advice. The project is monitored by an internal project steering committee chaired by the Group Manager Finance and Planning in his capacity as Chief Financial Officer.

To date, the project team has completed a high-level assessment to identify key differences between present New Zealand Generally Accepted Accounting Practice (NZ GAAP) and NZ IFRS that will impact on Inland Revenue. The project team has commenced detailed technical evaluation of identified transition issues and identified potential system and procedural changes.

The key areas of NZ IFRS expected to impact Inland Revenue are summarised as follows. The actual impact of adopting NZ IFRS may vary from the information presented.

The key impacts will be in the following areas:

Revenue

NZ IAS 18 - Revenue requires Inland Revenue to reclassify certain revenue categories (eg court cost recoveries) from "Other income" to "Revenue" in the Statement of Financial Performance when they form part of the ordinary business activities of Inland Revenue.

Leases

Under NZ IAS 17 - Leases certain contractual arrangements may need to be reclassified as operating leases. NZ IFRIC 4 - Determining Whether an Arrangement Contains a Lease requires an entity to account for a lease depending on the substance of the arrangement. Inland Revenue may need to classify contractual arrangements which meet the lease criteria.

Intangible assets

NZ IAS 38 - Intangible Assets requires an entity to classify software as intangible assets. Inland Revenue will need to reclassify software as intangible assets and test these intangibles for impairment on an annual basis.

Financial instruments and hedge accounting

NZ IAS 39 - Financial Instruments: Recognition and Measurement requires all derivatives and hedging instruments to be recorded at fair value in the Statement of Financial Position, with the related changes in fair value recorded either to equity or income depending on whether the instruments meet the NZ IAS 39 hedging criteria.

Inland Revenue currently enters into foreign currency forward exchange contracts to hedge currency transactions but does not recognise such derivatives in the Statement of Financial Position. On transition to NZ IFRS, these derivatives will be recognised at fair value in the Statement of Financial Position.

Inland Revenue will not be adopting hedge accounting as the cost of adopting will outweigh the benefit. More importantly, transactions between entities within the Government reporting entity do not qualify for hedge accounting in the financial statements of the Government.

Employee benefits

NZ IAS 19 - Employee Benefits requires an entity to recognise accumulating compensated absences such as sick leave if it is material. Sick leave should be accrued on the expected level of unused sick leave entitlement carried forward that is expected to be taken in the future.

As Inland Revenue's sick leave policy is a long-term benefit (ie the absences are not all expected to occur within 12 months of the financial period), the amount recognised as a liability will be the net total of the following amounts:

the present value of the defined benefit obligation at the balance sheet date
less the fair value at the balance sheet date of plan assets (if there are any) out of which the obligations are to be settled directly.

Discounting will be considered where the effect is material.

Related party disclosures

NZ IAS 24 - Related Party Disclosures requires an entity to make disclosure of key management compensations. Inland Revenue does not currently make such disclosure but on transition to NZ IFRS will be required to do so.

This page does not form part of the Statement of Accounting Policies and has not been audited.