Statement of Intent - 2004 - Part 2

Statement of accounting policies - pages 48-50

for the year ended 30 June 2005

Reporting entity

Inland Revenue is a government department as defined by section 2 of the Public Finance Act 1989.

These are the forecast financial statements of Inland Revenue prepared pursuant to section 34A of the Public Finance Act 1989.

Measurement system

These financial statements have been prepared on the basis of historical cost unless otherwise stated.

Accounting policies

The following particular accounting policies, which materially affect the measurement of financial results and financial position, have been applied.

Revenue

Inland Revenue derives revenue through the provision of outputs to the Crown, other government departments, and for services to third parties. This revenue is recognised when earned and is reported in the financial period to which it relates.

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 hours allocation.

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 uncollectable debts.

Operating leases

Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased items are classified as operating leases. Inland Revenue leases office premises, computer hardware and office equipment.

Property, plant and equipment

The cost of a fixed asset 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:

Computers	All
Software development	$50,000 and over
Software purchases	$5,000 and over
Leasehold improvements	$20,000 and over
Other	$2,000 and over

Any write-down of an item to its recoverable amount is recognised in the Statement of Forecast 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.

When assets under construction are completed and become operational they are recognised as fixed assets and depreciated over their useful lives.

Depreciation

Depreciation is provided on a straight-line basis on all fixed assets, 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:

Motor vehicles	5 years
IT equipment	3 - 5 years
Office equipment	5 years
Furniture	7 years
Leasehold improvements	5 - 7 years
Software	5 - 7 years

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.

Employee entitlements

Provision is made in respect of 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.

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 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 and creditors. All financial instruments are recognised in the Statement of Forecast Financial Position and all revenues and expenses in relation to financial instruments are recognised in the Statement of Forecast Financial Performance. All financial instruments are shown at their estimated fair values.

Goods and services tax (GST)

The Statement of Forecast Unappropriated Expenditure and the Statement of Departmental Expenditure and Appropriations are GST-inclusive. The Statement of Forecast Financial Position is GST-exclusive except for creditors and payables and debtors and receivables, which are GST-inclusive. All other financial statements and notes are GST-exclusive.

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 payables or debtors and receivables (as appropriate).

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.

Taxpayers' funds

This is the Crown's net investment in Inland Revenue.

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.

 

 

 

Date published: 16 Nov 2004

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