Departmental financial statements
Statement of accounting policies
Reporting entity
Inland Revenue is a government department as defined by the Public Finance Act 1989 ("Act"). It is a wholly owned entity of the Crown whose primary objective is to provide services for the community or social benefit rather than making a financial return. These are the financial statements of Inland Revenue prepared pursuant to the Act.
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 flow to the entity and the asset has a value that can be measured reliably.
The financial statements have been prepared in accordance with New Zealand generally accepted accounting practice (NZ GAAP). Compliance with NZ GAAP in this instance means complying with New Zealand financial reporting standards (NZ FRS).
Accounting policies
The following particular accounting policies, which materially affect the measurement of financial results and financial position, have been applied.
Budget figures
The Main Estimates are the budget figures presented in May 2006 and the Supplementary Estimates are those presented in May 2007. Transfers are 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 allocation of hours.
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 uncollectible debts.
Leases
A lease is classified as a finance lease if it transfers substantially all the risk and rewards incidental to the ownership of an asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to the ownership of an asset.
Inland Revenue only has operating leases - leases of office premises. Rentals payable under operating leases are recognised as an expense on a straight-line basis over the term of the relevant lease. Lease incentives received as incentive to enter into an operating lease are recognised immediately in the Statement of Financial Performance.
Any contractual arrangements deemed to be operating leases are recognised during the reporting period.
Property, plant and equipment
The cost of an item of property, plant and equipment 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:
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All |
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$50,000 and over |
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$5,000 and over |
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$20,000 and over |
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$2,000 and over |
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$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 property, plant and equipment, 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:
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5 years |
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3 - 5 years |
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5 years |
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7 years |
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1 - 7 years |
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5 - 7 years |
All property, plant and equipment other than motor vehicles are assumed to have no residual value. Motor vehicles are assumed to have a residual value equal to 30% of the acquisition price.
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.
Provisions
Inland Revenue recognises a provision for future expenditure of uncertain amount or timing when there is a present obligation (either legal or constructive) as a result of a past event, it is probable that expenditure will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Employee benefits
Provision is made for Inland Revenue's liability for annual, long-service 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.
Onerous contracts
Provision for onerous contracts is recorded at the best estimate of the expenditure required to settle the obligation. Provision for onerous contracts to be settled beyond 12 months is recorded at their present value as the effect of discounting is immaterial.
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)
All financial statements and notes are exclusive of GST apart from 'debtor Crown', 'other debtors', and 'accounts payables'.
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 other payables' or 'other debtors and prepayments'.
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 line with other government entities Inland Revenue will prepare its financial statements for the year ending 30 June 2008 under New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).
As part of the transition to NZ IFRS, Inland Revenue has been reporting NZ IFRS information to Treasury since 1 July 2006.
The following changes to the opening Statement of Financial Position under NZ IFRS at 1 July 2006 apply:
Leasing incentive liability
Under current NZ FRS, rent free periods are recognised upfront and not recognised as a liability. On transition to NZ IFRS short-term leasing incentive liability of $216,000 and long-term leasing incentive liability of $367,000 were recognised. As a result, "total current liabilities" have increased by $216,000 and "total non-current liabilities" by $367,000.
Inventories held for distribution
NZ IAS 2 - Inventories requires all inventories held for external distribution to be recognised as an asset. Under current NZ FRS, all inventories held for external distribution are expensed. On transition to NZ IFRS $2,374,000 worth of inventories held for distribution (e.g. returns and guides) are recognised in the Statement of Financial Position as part of inventories.
Financial instruments (Derivative financial assets)
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, all derivative financial instruments were recognised at fair value. This created a net asset of $137,000 in the Statement of Financial Position.
Intangible assets
NZ IAS 38 - Intangible Assets requires an entity to classify software as intangible assets and test these intangibles for impairment on an annual basis. Under current NZ FRS computer software was classified as part of property, plant and equipment. The net book value of computer software reclassified as an intangible asset on transition to NZ IFRS is $81,703,000. The reclassification has no impact on the overall "total non-current assets".
Employee benefits
Sick leave provision
Sick leave is not recognised as a liability under current NZ FRS. On transition to NZ IFRS, NZ IAS 19 - Employee Benefits requires an entity to recognise employees' unused sick leave entitlement that can be carried forward at balance date, to the extent that the entity anticipates it will be used by staff to cover future absences. A short-term sick leave liability of $2,024,000 and long-term sick leave liability of $5,025,000 have been recognised in the accounts. This has the effect of increasing "total current liabilities" by $2,024,000 and "total non-current liabilities" by $5,025,000.
Accrued staff salaries
Accrued staff salaries were classified as part of creditors and other payables under current NZ FRS. On transition to NZ IFRS, accrued staff salaries of $3,712,000 were transferred to current provision for employee benefits.
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 under current NZ FRS but will do so on adoption of NZ IFRS.
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