Annual Report 2008: Part six - Financial schedules - Crown as administered by Inland Revenue

Statement of accounting policies

Reporting entity

The Financial Schedules - Crown as administered by Inland Revenue 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 activity. The activities include elements of income, expenditure, assets and liabilities. These form part of the Financial Statements of the Government of New Zealand.

Reporting period

The reporting period for these financial schedules is for the year ending 30 June 2008. The financial schedules were authorised for issue by the Chief Executive of Inland Revenue on 30 September 2008.

Statement of compliance

The financial schedules 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 ending 30 June 2008 comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as appropriate for public benefit entities.

This is the first set of financial schedules prepared using NZ IFRS and accordingly comparatives for the year ended 30 June 2007 have been restated under NZ IFRS. Refer to Note 10: Explanation of Transition to NZ IFRS for reconciliations of movements between Departments - Crown as administered by Inland Revenue from balances reported in the 30 June 2007 financial schedules under the previous 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 schedules and in preparing an opening NZ IFRS Statement of Financial Position as at 1 July 2006 for the purposes of the transition to NZ IFRS.

These financial schedules have been prepared on a historical cost basis unless otherwise stated.

The accrual basis of accounting has been used unless otherwise stated. These financial schedules 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 schedules 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.

Material judgements, estimates and assumptions impact on student loan debt, tax receivables and child support receivables. More information on these is provided in notes 1, 2 and 3 respectively.

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 Inland Revenue include:

• 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 schedule of comprehensive income with subtotals, or in two separate schedules (a separate income schedule followed by a schedule of comprehensive income). Inland Revenue expects it will apply the revised standard for the first time for the year ended 30 June 2010, and is yet to decide on whether it will prepare a single schedule of comprehensive income or a separate income schedule followed by a schedule of comprehensive income.

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 2007 and the Supplementary Estimates are those presented in May 2008.

Revenue

Taxation receipts

The Crown provides many services and benefits that do not give rise to revenue. Further, payment of tax does not, of itself, 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.

Taxation and duties is accounted for as income under the NZ IFRS with an accounting treatment consistent with IPSAS 23 - Revenue from Non Exchange transactions (Taxes and Transfers). The Crown account recognises income from taxes and duties as follows:

Revenue type	Revenue recognition point
Source deductions	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	When benefits are provided that give rise to FBT
Provisional tax	When taxable income is earned
Terminal tax	When the terminal assessment is filed
Goods and service 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

Interest income

Interest income is accrued using the effective interest rate method. The effective interest rate exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. The method applies this rate to the principle outstanding to determine interest income each period.

Expenses

General

Expenses are recognised in the period to which they relate.

Interest expense

Interest expense is recognised as it is applied to the following schemes:

• Income equalisation reserve scheme.
• Adverse event income equalisation reserve scheme.
• Environmental restoration account.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash in transit and bank accounts

Financial instruments

Financial assets

Loans and receivables are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method (refer interest revenue policy).

Inland Revenue has significant debtor portfolios which are designated as "loans and receivables". These include tax debt, child support debt, family support debt, and student loans.

In accordance with this general policy, student loans are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method, and adjusted for impairment movements. Fair value on initial recognition of student loans is determined by projecting forward expected repayments and discounting them back at an appropriate discount rate. The difference between the amount lent and the fair value on initial recognition is expensed on initial recognition. The subsequent measurement at amortised cost is determined using the effective interest rate calculated at initial recognition. This rate is used to spread the Crown's interest income across the life of the loan and determines the loan's carrying value at each reporting date.

Receivables arising from taxes and duties meet the definition of assets but are not within the scope of any specific standard and are specifically excluded from the definition of financial instruments (NZ IAS 32, AG 12). They are therefore measured in accordance with assets of the most similar designation under NZ IAS 39 which is loans and receivables. Further the standard permits measurement at nominal value if the effect of discounting is immaterial. These receivables are initially recognised at nominal value and tested annually for impairment.

Tax receivables are recognised initially at the amount of tax owed, subsequently adjusted for penalties and interest as they are charged, and tested for impairment. Interest and penalties charged on tax receivables is presented as tax revenue in the Schedule of Revenue. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired. Impairment movements are recognised in the Schedule of Expenditure. Financial models have been constructed for the Inland Revenue to calculate the general tax and child support impairment. These models apply a number of assumptions on future repayment behaviour as well as economic assumptions such as the discount rate and inflation.

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. 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 a loss event has an impact on the estimated future cash flows of the loan that can be reliably measured. The amount of the provision is the difference between the asset's carrying amount and estimated impaired value. The impairment losses are recognised in the Schedule of Financial Performance.

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

Financial liabilities

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.

Contingent assets and liabilities

Contingent assets and liabilities are recorded in the Schedule of Contingent Liabilities and Contingent Assets 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.

Contingent assets arise where Inland Revenue has advised a taxpayer of a proposed adjustment to their tax assessment. The taxpayer has the right to dispute this adjustment and a disputes resolution process is entered into. Inland Revenue quantifies a contingent asset based on the likely outcome of the disputes process based on experience and similar prior cases.

If the case is still not resolved at the end of the disputes process, Inland Revenue will issue an amended assessment to the taxpayer which then allows the taxpayer to file proceedings with the Taxation Review Authority or the High Court. The issue of the amended assessment is the point at which revenue is recognised in the Crown schedules. The contingent liability is the maximum liability the Inland Revenue has in respect of these cases.

Comparatives

When presentation or classification of items in the financial statements is amended or accounting policies are changed voluntarily, comparative figures have been restated to ensure consistency with the current period unless it is impracticable to do so.

Changes in accounting policies

There have been no changes in accounting policies applicable to the preparation of financial schedules of Crown activities administered by Inland Revenue other than those related to the adoption of NZ IFRS.

 

 

Date published: 15 May 2009

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