Statement of accounting policies
Reporting entity
Inland Revenue is a government department as defined by section 2 of the Public Finance Act 1989 and is domiciled in New Zealand. It is a wholly owned entity of the Crown whose primary objective is to provide services to the public rather than making a financial return. Accordingly, Inland Revenue has designated itself as a public benefit entity for the purpose of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).
Inland Revenue's head office is 12-22 Hawkestone Street, Wellington.
Reporting period
The reporting period for these financial statements is for the year ended 30 June 2008. The financial statements were authorised for issue by the Chief Executive of Inland Revenue on 30 September 2008.
Statement of compliance
The financial statements have been prepared in accordance with the requirements of the Public Finance Act 1989, which includes the requirement to comply with New Zealand generally accepted accounting practice (NZ GAAP). Compliance with NZ GAAP in this instance means the figures for the year ended 30 June 2008 comply with NZ IFRS and other applicable Financial Reporting Standards, as appropriate for public benefit entities
This is the first set of financial statements prepared using NZ IFRS and, accordingly, comparatives for the year ended 30 June 2007 have been restated under NZ IFRS. Refer to Note 24: Explanation of Transition to NZ IFRS for reconciliations of equity and net surplus from balances reported in the 30 June 2007 financial statements under New Zealand Financial Reporting Standards (NZ FRS) to that reported under NZ IFRS.
Basis of preparation
The accounting policies set out below have been applied consistently to all periods presented in these financial statements, and in preparing an opening NZ IFRS Statement of Financial Position as at 1 July 2006 for the purpose of the transition to NZ IFRS.
These financial statements have been prepared on a historical cost basis, unless otherwise stated.
The accrual basis of accounting has been used, unless otherwise stated. These financial statements are presented in New Zealand dollars and all values are rounded to the nearest thousand dollars ($'000). The functional currency of Inland Revenue is New Zealand dollars.
Judgements and estimations
The preparation of financial statements in conformity with NZ IFRS requires judgements, estimates 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.
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 periods if the revision affects both current and future periods.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below:
- Note 12 Provision for Employee Benefits provides an analysis of the exposure in relation to estimates and uncertainties surrounding retirement, long service leave, and sick leave liabilities.
Standards and interpretations issued and not yet adopted
Standards, amendments and interpretations issued but not yet effective that have not been early adopted, and which are relevant to the Inland Revenue include:
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NZ IAS 1 Presentation of Financial Statements (revised 2007) replaces NZ IAS 1 Presentation of Financial Statements (issued 2004) and is effective for reporting periods beginning on or after 1 January 2009. The revised standard requires information in financial statements to be aggregated on the basis of shared characteristics and to introduce a statement of comprehensive income. This will enable readers to analyse changes in equity resulting from transactions with the Crown in its capacity as "owner" separately from "non-owner" changes.
The revised standard gives Inland Revenue the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). Inland Revenue expects it will apply the revised standard for the first time for the year ending 30 June 2010.
- NZ IAS 23 Borrowing Costs (revised 2007) replaces NZ IAS 23 Borrowing Costs (issued 2004) and is effective for reporting periods commencing on or after 1 January 2009. The revised standard requires all borrowing costs to be capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. Inland Revenue does not intend to adopt this standard for the year ending 30 June 2010, as capital charge is excluded from the definition of borrowing costs1.
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 included in Inland Revenue's Statement of Intent for the year ended 30 June 2008, which are consistent with the financial information in the Main Estimates. In addition, the financial statements also present the updated budget information from the Supplementary Estimates.
Goods and services tax (GST)
All items in the financial statements, including appropriation statements, are stated exclusive of GST, except for "debtor Crown", "other debtors" and "accounts payable", which are stated on a GST inclusive basis. Where GST is not recoverable as input tax, then it is recognised as part of the related asset or expense.
The net 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" in the Statement of Financial Position.
The net GST paid to or received from Inland Revenue, including the GST relating to investing and financing activities is classified as an operating cash flow in the Statement of Cash Flows.
Commitments and contingencies are disclosed exclusive of GST.
Taxation
Government departments are exempt from income tax as public authorities. Accordingly, no charge for income tax has been provided for.
Revenue
Inland Revenue derives revenue through the provision of outputs to the Crown, government departments, and for services to third parties. Revenue comprises the fair value of sale of services, net of GST, rebates and discounts. Revenue is recognised as follows:
Sale of services
Sale of services are recognised in the accounting period in which the services are rendered, by reference to completion of specific transactions, assessed on the basis of actual services provided as a proportion of the total services to be provided.
Sub-lease income
Income from sub-leased property is recognised in the Statement of Financial Performance on a straight line basis over the term of the lease.
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 allocation to outputs.
There have been no material changes in cost accounting policies, since the date of the last audited financial statements.
Capital charge
The capital charge is recognised as an expense in the period to which the charge relates.
Leases
A lease is classified as a finance lease if it transfers substantially all the risks and rewards of 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 - lease 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 also recognised evenly over the term of the lease as a reduction in the rental expense.
Contractual arrangements deemed to be operating leases have been recognised during the reporting period.
Financial instruments
Financial assets
Inland Revenue classifies its financial assets into two categories: financial assets at fair value through profit or loss, and loans and receivables. The classification depends on the purpose for which the assets were acquired.
a) Financial assets at fair value through profit or loss
Financial assets designated at fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the Statement of Financial Performance. Gains or losses from foreign exchange and other fair value movements are separately reported in the Statement of Financial Performance. Transaction costs are expensed as they are incurred. Derivatives (eg, foreign forward exchange contracts) are classified under this category.
Derivative financial instruments are recognised both initially and subsequently at fair value. They are reported as either assets or liabilities, depending on whether the derivative is in a net gain or net loss position, respectively. The fair value gains or losses on derivatives are recognised in the Statement of Financial Performance.
b) Loans and receivables
Loans and receivables 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. Receivables issued with duration of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Inland Revenue only has receivables which are classified as "debtor Crown" and "other debtors and prepayments" in the Statement of Financial Position.
Impairment of financial assets
Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that Inland Revenue will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter into bankruptcy, and default in payments are considered indicators that the debtor is impaired.
The amount of the provision is the difference between the asset's carrying amount and estimated nominal value of the impairment. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the impairment loss is recognised in the Statement of Financial Performance.
Financial liabilities
Inland Revenue classifies its financial liabilities into two categories: financial liabilities at fair value through profit or loss, and other financial liabilities. The classification depends on the purpose for which the liabilities were incurred.
a) Financial liabilities at fair value through profit or loss
Financial liabilities designated at fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the Statement of Financial Performance. Gains or losses from foreign exchange and other fair value movements are separately reported in the Statement of Financial Performance. Transaction costs are expensed as they are incurred. Derivatives (eg, foreign forward exchange contracts) are classified under this category.
b) Other financial liabilities
Other financial liabilities are recognised initially at fair value less transaction costs and subsequently measured at amortised cost using the effective interest rate method. Financial liabilities entered into with duration of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. "Creditors and other payables" are recognised at their nominal value as the effect of discounting is immaterial.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and bank accounts. All cash held in bank accounts is held in "on demand" accounts and no interest is payable to Inland Revenue.
Inventories held for distribution
Inventories held for distribution comprise forms, booklets and returns that are held for distribution to the public at no or nominal consideration in the ordinary course of operations.
Inventories held for distribution are carried at the lower of cost and current replacement cost. The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Current replacement cost is the cost that would be incurred to acquire the asset on the reporting date. Where inventories are acquired at no cost, or for nominal consideration, the cost is deemed to be the current replacement cost as at the date of acquisition.
The carrying amount is recognised as an expense in the period in which the goods are distributed. The amount of any write-down of inventories and all losses of inventories is recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.
Hedge accounting, hedging activities and foreign currency transactions
Inland Revenue's activities expose it primarily to risks of changes in foreign exchange rates. Inland Revenue uses derivative financial instruments (primarily, foreign currency forward exchange contracts) to hedge its risks associated with foreign currency fluctuations relating to certain commitments. The use of financial derivatives is governed by Inland Revenue's Foreign Exchange Policy, which provides written principles on the use of financial derivatives consistent with Inland Revenue's risk management strategy.
Inland Revenue does not hold or issue derivative financial instruments for trading purposes. It also has not adopted hedge accounting.
Foreign currency transactions (including those for which forward exchange contracts are held) are translated into New Zealand dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognised in the Statement of Financial Performance.
Property, plant and equipment
Inland Revenue has operational assets that include leasehold improvements, IT equipment, furniture and office equipment, and motor vehicles. The capitalisation thresholds are:
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All |
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$2,000 and over |
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$2,000 and over |
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$2,000 and over |
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$20,000 and over |
Property, plant and equipment are shown at historical cost, less accumulated depreciation and impairment losses. Historical cost 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.
Additions
The cost of an item of property, plant and equipment is recognised as an asset if it's probable that future economic benefits or service potential associated with the item will flow to Inland Revenue and the cost of the item can be measured reliably. In most instances, an item of property, plant and equipment is recognised at its cost. Where an asset is acquired at no cost, or for a nominal cost, it is recognised at fair value as at the date of acquisition.
Subsequent costs
Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Inland Revenue and the cost of the item can be measured reliably. All repairs and maintenance are charged to the Statement of Financial Performance during the financial period in which they are incurred.
Depreciation
Depreciation is provided on a straight-line basis on all property, plant and equipment, other than assets under construction. The rate of depreciation will write off the cost of the asset to the estimated residual value over the useful life of the asset. The useful life of major classes of assets have been estimated as follows:
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3 to 5 years |
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5 to 7 years |
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5 years |
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1 to 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 life of the improvements, whichever is shorter, up to a maximum of 7 years.
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.
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Impairment of property, plant and equipment
An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.
Disposals
Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the Statement of Financial Performance.
Intangible assets
Inland Revenue has intangible assets in the form of software.
Additions
Intangible assets are initially recorded at cost. Inland Revenue only has intangible assets with finite useful lives. The three main categories are: software - developed, software and licences - purchased, and business process design.
a) Software - developed
The cost of an internally generated intangible asset represents expenditure incurred in the development phase of the asset only. The cost of developed computer software comprises direct labour, material purchased and an appropriate portion of relevant overheads. These are costs that are directly associated with the development of identifiable and unique software controlled by Inland Revenue, and will generate economic benefits.
Expenditure incurred on research of an internally generated intangible asset is expensed when it is incurred. Where the research phase cannot be distinguished from the development phase, the expenditure is expensed when it is incurred.
Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Costs of configuring and customising purchased software for intended use are capitalised.
b) Software and licences - purchased
Intangible assets acquired by Inland Revenue such as computer software and licences are stated at cost less accumulated amortisation and impairment losses. Acquired computer software and licences are capitalised on the basis of costs incurred to acquire and bring to use the specific software.
c) Business process design
Expenditure on development activities, whereby research findings are applied to a plan or design for new or substantially improved business processes, is capitalised if the business process is technically and commercially feasible and Inland Revenue has sufficient resources to complete development (eg, system training package). Other development expenditure is recognised in the Statement of Financial Performance as an expense as incurred.
The capitalisation thresholds for intangible assets are:
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$50,000 and over |
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$5,000 and over |
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$50,000 and over |
Subsequent cost
The cost of intangible assets with finite lives is subsequently recorded at cost less any amortisation and impairment losses.
Amortisation
The carrying value of an intangible asset with a finite life is amortised on a straight-line basis over its estimated useful life. Amortisation begins when the asset is available for use and ceases at the date that the asset is derecognised. The amortisation charge for each period is recognised in the Statement of Financial Performance.
The useful lives of major classes of intangible assets have been estimated as follows:
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5 to 7 years |
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5 to 7 years |
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5 to 7 years |
Impairment of intangible assets
At each balance date, Inland Revenue reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where an intangible assets' recoverable amount is less than its carrying amount, it will be reported at its recoverable amount and an impairment loss will be recognised in the Statement of the Financial Performance. The reversal of an impairment loss is also recognised in the Statement of Financial Performance.
Derecognition
The gain or loss arising from the derecognition of intangible assets is recognised in the Statement of Financial Performance when the assets is derecognised.
Employee benefits
Short-term benefits
Employee benefits that Inland Revenue expects to be settled within 12 months of balance date are measured at nominal values based on accrued entitlements at current rates of pay. These include salaries and wages accrued up to balance date, annual leave and time off in lieu earned up to but not yet taken at balance date, retiring and long-service leave, and sick leave entitlements expected to be settled within 12 months.
Inland Revenue recognises a liability for sick leave to the extent that absences in the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated based on the unused sick leave entitlement that can be carried forward at balance date, to the extent that Inland Revenue anticipates it will be used by staff to cover those future absences.
Inland Revenue recognises a liability and an expense for bonuses where it is contractually obliged to pay them, or where there is a past practice that has created a constructive obligation.
Long-term benefits
Employee benefits that are payable beyond 12 months such as long-service leave and retiring leave, and sick leave have been calculated on an actuarial basis, based on the present value of the estimated future cash outflows.
Long-service leave and retiring leave
The actuarial calculations for long-service leave and retiring leave liabilities are based on:
- A projection of the amount of each of the benefits that would be due to each employee in each future year, and the applied probabilities of the employee remaining in service to the start of that year and becoming entitled to the benefit during that year; and
- The present value of the estimated future cash flows using a discount rate of 6% and salary increase rate of 4%. The discount rate is based on the expected long-term return on 10-year New Zealand government bonds. The salary increase rate is based on a basic annual rate of 2.5% which represents long-term price inflation, determined after considering the published views of various economists, with an addition of 1.5% being the best estimate of the difference between salary inflation and price inflation.
Sick leave
The actuarial calculations for sick leave liabilities are based on:
- The number of days' sick leave taken in future that will be taken from the balance accumulated at the valuation date. A projection for each relevant employee of the amount of the new sick leave entitlement that would arise in each future year, the sick leave that would be taken in each year, and the accumulated balance at the end of each year. The amount of the number of days' sick leave remaining out of the accumulated balance as at the valuation date was also tracked. Sick leave was deemed to be taken on last-in-first-out basis (ie new entitlements added in future will need to all be used before any of the balance accumulated at the valuation date is used), and
- The present value of the estimated future cash flows using a discount rate of 6.5% and salary increase rate of 4%. The discount rate is based on the expected long-term return on 2-year New Zealand government bonds. The salary increase rate is based on a basic annual rate of 2.5%, which represents long-term price inflation, determined after considering the published views of various economists, with an addition of 1.5% being our best estimate of the difference between salary inflation and price inflation.
Superannuation schemes
Inland Revenue has two types of superannuation plans: defined contribution plans and defined benefit plans.
Defined contribution plans are post-employment benefit plans, under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Whereas, defined benefit plans are post-employment benefit plans other than defined contribution plans.
Obligations for contributions to the Inland Revenue Superannuation Scheme, State Sector Retirement Savings Scheme, KiwiSaver, and the Government Superannuation Fund are accounted for as defined contribution schemes and are recognised as an expense in the Statement of Financial Performance as they fall due.
Termination benefits
Termination benefits are payable whenever an employee's employment contract is terminated before their normal retirement or whenever an employee accepts voluntary redundancy in exchange for these benefits. Inland Revenue recognises the expenditure in the Statement of Financial Performance when it is demonstrably committed to either terminate the employment of current employees, according to a detailed formal plan without the possibility of withdrawal, or as a result of an offer to encourage voluntary redundancy.
Termination benefits settled within 12 months are reported at the amount expected to be paid, otherwise they are reported as the present value of the estimated future cash outflows.
Provisions
Inland Revenue recognises a provision for future expenditure of uncertain amounts or timing where there is a present obligation (either legal or constructive) as a result of a past event, and 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. Provisions are not recognised for future operating losses.
Provisions are recorded at the best estimate of the expenditure required to settle the obligation. Provisions to be settled beyond 12 months are recorded at their present value.
Taxpayers' funds
This is the Crown's net investment in Inland Revenue. It is measured as the difference between total assets and total liabilities. Taxpayers' funds are disaggregated and classified into a number of components:
- Capital contributions
- Repayment of capital to the Crown
- Provision for repayment of surplus to the Crown.
Statement of Cash Flows
Cash and cash equivalents mean cash balances on hand, and cash held in bank accounts.
Operating activities include cash received from all income sources of Inland Revenue, and 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.
Commitments
Future expenses and liabilities to be incurred on non-cancellable contracts that have been entered into at balance date are disclosed as commitments to the extent that they are equally unperformed obligations.
Cancellable commitments that have penalty or exit costs explicit in the agreement on exercising that option to cancel are included in the Statement of Commitments at the value of that penalty or exit cost.
Contingent assets and liabilities
Contingent assets and liabilities are recorded in the Statement of Contingent Liabilities at the point at which the contingency is evident. Contingent assets are disclosed if it is probable that the benefits will be realised. Contingent liabilities are disclosed if the possibility that they will crystallise is not remote.
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, except for NZ IFRS adjustments. All policies have been applied on a basis consistent with the previous year.
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