Statement of accounting policies

Reporting entity

The Crown Financial Schedules have been prepared and administered by Inland Revenue in accordance with the requirements of the Public Finance Act 1989.

The schedules represent extracts of Crown activities. The activities include elements of income, expenditure, assets, liabilities and cash flows. These form part of the consolidated Crown financial statements of the New Zealand Government.

Measurement system

The schedules have been prepared on an accrual and modified historical cost basis of accounting unless otherwise stated. In line with the Statement of Concepts, an asset is recognized in the Statement of Financial Position only when it is probable that the future economic benefits will flow to the entity and the asset has a value that can be measured reliably.

Accounting policies

These Financial Schedules comply with the New Zealand Generally Accepted Accounting Practice (NZ GAAP). The following accounting policies that materially affect the measurement of financial results and financial position have been applied.

Budget figures

The budget figures for revenue, assets, liabilities and cash flows are those prepared by Inland Revenue's independent forecast, as presented in the Statement of Intent 2006-09 (SOI). The SOI is prepared as part of the preparation for the 2005-06 Main and Supplementary Estimates.

Revenue

The Crown provides many services and benefits that do not give rise to revenue. Payment of tax does not entitle a taxpayer to an equivalent value of services or benefits, as there is no direct relationship between paying tax and receiving Crown services and transfers. Where possible, revenue is recognised at the time the debt to the Crown arises.

Revenue type	Revenue recognition point
Source deductions (PAYE)	When an individual earns income that is subject to PAYE
Resident withholding tax*	When an individual is paid interest or dividends subject to deduction at source
Fringe benefit tax (FBT)	When benefits are provided that give rise to FBT
Provisional tax**	Provisional tax is recognised in the period which it is earned
Terminal tax**	Assessment filed date
Goods and services tax	When the liability to the Crown is incurred
Stamp, cheque and credit card duties	When the liability to the Crown is incurred
Other indirect taxes	When the debt to the Crown arises
*  Corresponds to withholding taxes on residents' interest and dividends.
** Provisional and terminal taxes are paid by "other persons" and companies.

Change in revenue recognition point

A change in revenue recognition estimation for provisional tax means that revenue is recognised in the period in which it is earned. In previous years, the estimation was on the payment due date. An adjustment of $1,755 million has been made in the Schedule of Revenue to reflect the methodology impact of the change in estimation process with an equivalent increase to tax receivables in the Statement of Financial Position. This change has no impact on the underlying cash flows of the Crown.

Investment income

Investment income is recognised in the period in which it is earned.

Receivables and advances

Receivables and advances are recorded at the amounts expected to be ultimately collected in cash.

Student loans

Student loans are recorded at amortised cost. Student loan disclosures are recorded inStudent loans.

Liabilities

All liabilities are recorded at the estimated obligation to pay.

Contingent liabilities

Contingent liabilities are recorded in the Schedule of Contingent Liabilities at the point at which the contingency is evident.

Changes in accounting policies

In November 2005 the Government agreed that interest will not be charged on student loans where certain criteria, largely related to being domiciled in New Zealand, are met. To better reflect the value of student loans under this interest-free policy, the accounting policy for reporting loans has also been updated. The policy is to initially recognise student loans at their fair value and to subsequently report them at amortised cost. It is to apply from 2005-06 and is consistent with the "loans and receivables" designation under International Accounting Standard 39 (IAS 39) for financial instruments. The Crown will be adopting the New Zealand equivalent to IAS 39 for all financial instruments from 1 July 2007.

The key changes resulting from the interest-free student loan policy and adoption of a new accounting policy are:

• There is a one-off write-down of $1,414.7 million in 2005-06 of the existing loan book to fair value
• The difference between the fair value of new loans and the amount lent is recognised as an expense in the year the loan is provided
• The initial fair value write-down will be unwound (ie recognised as income) over the maturity of the loans. The value will be adjusted for any impairment (eg non-repayments caused by death or bankruptcy of the borrowers).

For an analysis of the annual movement in student loans refer to Schedule of Student Loan Movements in the Financial Schedules for Administered Accounts - Crown on page 116. All other 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 ended 30 June 2008. However, as comparative figures must be presented on the same basis of accounting, the comparative figures for the year ending 30 June 2007, and an opening Statement of Forecast Financial Position at 1 July 2006, will need to be restated in accordance with NZ IFRS.

Inland Revenue has formed a project team to manage the transition to NZ IFRS. Independent external advice is sought where necessary. 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 current New Zealand Generally Accepted Accounting Practice (NZ GAAP) and NZ IFRS that have an impact on Inland Revenue. The project team is working towards the conversion timetable.

Key impacts will be in the following areas:

Loans and receivables

Under NZ IAS 39 - Financial Instruments: Recognition and Measurement, financial assets (including loans and receivables) are required to be recognised initially at fair value and subsequently at amortised cost.

Inland Revenue has significant debtor portfolios which are designated as "Loans and Receivables". These include tax debt, child support debt and family support debt. On transition to NZ IFRS, these debtor portfolios will be recognised at fair value in the Financial Schedules for Administered Accounts.

The student loan debt has been recognised at fair value in the current financial year.

Revenue recognition for taxes

There are currently no standards in place that deal comprehensively with accounting for revenues from non-exchange transactions by Inland Revenue. The International Public Sector Accounting Standards Board (IPSAS) has issued an Exposure Draft (ED 29) Revenue from Non-Exchange Transactions (Including Taxes and Transfers). Inland Revenue has reviewed ED 29 and made a submission to the IPSAS for consideration and awaits the outcome of the consultation.

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