Notes to the financial schedules

Note 1: Student loan movements

2005/06 Actual $000		2006/07 Actual $000	2006/07 Main Estimates $000	2006/07 Supp Estimates $000
	Analysis of student loans portfolio
7,472,711	Nominal loan balance	8,403,789	8,017,338	8,359,529
(2,494,634)	Adjustment to fair value	(2,974,543)	(2,661,757)	(3,111,587)
4,978,077	Total student loans balance	5,429,246	5,355,581	5,247,942
	Movement during the year
5,766,421	Opening balance	4,978,077	4,910,876	4,978,066
(1,249,551)	Initial fair value write-down and subsequent impairment	(151,052)	-	(326,475)
966,469	Loans transferred from Ministry of Social Development to Inland Revenue	1,003,510	1,153,577	1,066,823
(320,868)	Fair value write-down on new borrowings transferred	(320,357)	(404,864)	(432,065)
(306,519)	Capital repayments	(448,958)	(517,537)	(453,562)
(179,854)	Interest repayments	(37,500)	(41,962)	(38,607)
(12,812)	Death and bankruptcy	-	(15,420)	(10,770)
314,791	Interest unwind	314,247	270,911	322,572
-	Interest charged	91,279	-	141,960
4,978,077	Closing student loans balance	5,429,246	5,355,581	5,247,942
369,354	Short term student loans	547,512	501,721	358,615
4,608,723	Long term student loans	4,881,734	4,853,860	4,889,327
4,978,077	Total	5,429,246	5,355,581	5,247,942

Student loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method, less any impairment loss.

The effective interest rate discounts estimated future cash flows through the expected life of the loan to the net carrying amount of the loan, excluding future credit losses. Interest is recognised on the loan evenly in proportion to the amount outstanding over the period to repayment.

Allowances for impairments are recognised when there is objective evidence that the loan is impaired. Impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan, and that a "loss" event (or events) has an impact on the estimated future cash flows of the student loan book that can be reliably measured.

Impairment losses can be reversed where there is evidence that the impaired value has increased.

Student loan valuation model

The valuation model has been adapted to reflect current student loans policy. As such, the book value is sensitive to changes on a number of underlying assumptions, including future income levels, repayment behaviour and macro economic factors such as inflation and the discount rates used to determine the effective interest rate on new borrowers. The significant assumptions are shown below:

	30 June 2007	30 June 2006
Weighted average effective interest rate	7.12%	6.63%
Interest rate applied to loans for overseas borrowers	6.7% - 7.2%	6.9% (6.7% outyears)
Cost of administration as % of the average outstanding loan balance	0.15%	0.15%
CPI	2.4% - 2.6%	3.2%
Future salary inflation	3.4% - 3.6%	3.6%

Student loans fair value

Fair value is the amount for which the loan book value could be exchanged between knowledgeable, willing parties in an arm's-length transaction as at 30 June 2007. It is determined by discounting the estimated cashflows at an appropriate discount rate.

The estimated fair value of the student loan debt at 30 June 2007 has been determined to be approximately $4,897.6 million ($4,992.5 million at 30 June 2006).

Fair values will differ from carrying values due to changes in market interest rates, as the carrying value is not adjusted for such changes. They will also differ in the treatment of credit losses, as carrying values adjust for credit losses that have been incurred while fair values capture adjustments for expected future credit losses. The difference between fair value and carrying value does not represent an impairment of the asset.

The fair value calculated is sensitive to underlying assumptions chosen. For example, a 1% increase in the discount rate would decrease fair value by approximately $206 million, whereas a 1% decrease in the discount rate would increase fair value by approximately $229 million.

Despite the increase in the nominal value of student loans outstanding, the fair value of the student loan portfolio is lower than that calculated last year (and lower than the carrying value) because of an increase in the risk free discount rates used in the fair value calculation and an increase in expected future credit losses. The risk free rates are determined by calculating forward rates from the yields and coupons of NZ Government Stock. Forward rate yield projections move from 7.7% in 2007 to 6.2% from 2016 and thereafter (projections as at June 2006 were 6.9% in 2006 to 5.8% from 2016 and thereafter).

The Student Loan Annual Report contains more information on the student loan scheme.

Credit risk

For the Student Loan Scheme, credit risk is the risk that borrowers will default on their obligation to repay their loans or die before their loan is repaid, causing the scheme to incur a loss.

The Student Loan Scheme policy does not require borrowers to provide any collateral or security to support advances made. As the total sum advanced is widely dispersed over a large number of borrowers, the Student Loan Scheme does not have any material individual concentrations of credit risk.

The credit risk is reduced by collection of compulsory repayments through the tax system.

Interest rate risk

Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in interest rates. Changes could impact on the government's return on loans advanced. The interest rate and the interest write-off provisions attached to student loans are set by the government.

Note 2: Income equalisation, adverse event and environmental scheme

Income equalisation is a scheme where taxpayers in the farming, fishing and forestry industries can elect to make payments during the year by way of income equalisation deposits. Interest at a rate of 3% is paid, provided that no withdrawals are made within 12 months of the date of the deposit.

The adverse event income equalisation scheme operates in addition to the ordinary income equalisation scheme. Interest at a rate of 6.5% is paid on deposits. Deposits can be withdrawn immediately, but are transferred to the main income equalisation account if not withdrawn within 12 months of the deposit.

The environmental restoration scheme is a scheme whereby a business deposits funds into an environmental restoration account. The environmental restoration account scheme allows businesses to set money aside to cover restoration cost for monitoring, avoiding, remedying or mitigating the detrimental environmental effects of the discharge of contaminants which will be incurred in later income years. Interest at a rate of 3% is paid on the deposit while it is held in the scheme. The refund is made when the environmental restoration costs are incurred.

Note 3: Accident Compensation collections

2005/06 Actual $000		2006/07 Actual $000	2006/07 Main Estimates $000	2006/07 Supp Estimates $000
(10)	Residual claims levy and earners' account levy - self employed*	-	-	-
873,615	Earner premium - employees - provisional	987,011	878,100	959,000
873,605	Total accident compensation collection	987,011	878,100	959,000

* For the 1999 return period, Inland Revenue started collecting residual claims and earners' levies, instead of the old ACC premiums.

From 1 April 2002, ACC took over the responsibility for collecting residual claims levies.

We collect the levies on behalf of the Accident Compensation corporation and pass the monies directly to them. This does not appear on the Crown schedules.