Statement of Intent 2006-09: Part Four - Forecast departmental financial statements and performance objectives
Statement of accounting policies
for the year ending 30 June 2007
Reporting entity
Inland Revenue is a government department as defined by the Public Finance Act 1989. These are the forecast financial statements of Inland Revenue prepared pursuant to the Public Finance Act 1989.
Measurement system
These forecast 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. Such revenue is recognised when earned and is reported in the financial period 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 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.
Capital charge
The Crown charges Inland Revenue a levy on taxpayers' funds at the rate of 7.5% on the capital employed. This charge is based on the taxpayers' funds held by Inland Revenue as at 31 December and 30 June each financial year, and paid in arrears.
Debtors and receivables
Debtors and receivables are recorded at estimated realisable value, after providing for doubtful and uncollectable debts.
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. Inland Revenue has no leases classified as finance leases.
Fixed assets
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 |
| Set-up of new site or activity | $20,000 and over |
| Other assets | $2,000 and over |
| Grouped assets | $20,000 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 and 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 | 1-7 years |
| Software | 5-7 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 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 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.
Statement of forecast 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 exchange cover has been used to establish the price of a transaction, the forward rate specified in that foreign exchange cover 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 forecast financial position and all revenues and expenses in relation to financial instruments are recognised in the Statement of forecast 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)
The Statement of forecast financial position is exclusive of GST 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.
Operating leases include lease payments for premises, computer and IT equipment, and office equipment.
Inland Revenue has long-term leases on its premises at many locations throughout New Zealand. The annual lease payments are subject to regular reviews and the amounts disclosed as future commitments are based on the current rental rates.
Commitments for non-cancellable accommodation leases include commitments for office space that was vacated by Inland Revenue as a result of organisational restructuring and subleased. Provision has been made in the financial statements for the expected net expenses for the duration of these leases.
Inland Revenue has entered into non-cancellable contracts for computer maintenance and other contracts for goods and services.
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.
Adoption of New Zealand equivalents to International Financial Reporting Standards
In August 2003, the Government announced that the Crown would apply New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) in the preparation of its financial statements from Budget 2007. To comply with this decision, Inland Revenue will apply NZ IFRS in the preparation of financial statements for the year ended 30 June 2008. Inland Revenue will be collecting NZ IFRS information throughout 2006-07 as part of the transition to NZ IFRS. This information will be used to inform the 2007 Statement of Intent forecasts and the Government's 2007 Budget (both of which will contain NZ IFRS information), and provide the comparative NZ IFRS information to be reported in the 2007-08 financial statements.
In preparation for the adoption of NZ IFRS, Inland Revenue has formed a project team and sought independent external advice. The project is monitored by an internal project steering committee chaired by the Group Manager Finance and Planning in his capacity as Chief Financial Officer.
To date the project team has completed a high level assessment to identify key differences between present New Zealand Generally Accepted Accounting Practice (NZ GAAP) and NZ IFRS that will impact on lnland Revenue. The project team has commenced detailed technical evaluation of identified transition issues and identified potential system and procedural changes.
The key areas of NZ IFRS expected to impact Inland Revenue are summarised below. As changes are continuing to be made to NZ IFRS, there may be further changes to the information disclosed below prior to adoption.
The key impacts will be in the following areas:
Intangible assets
NZ IAS 38 - Intangible Assets requires an entity to classify software as intangible assets.
Inland Revenue will need to reclassify software as intangible assets and test these intangibles for impairment on an annual basis.
Financial instruments and hedge accounting
NZ IAS 39 - Financial Instruments: Recognition and Measurement requires all derivatives and hedging instruments to be recorded at fair value in the Statement of financial position, with the related changes in fair value recorded either to equity or income depending on whether the instruments meet the NZ IAS 39 hedging criteria.
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, these derivatives will be recognised at fair value on the Statement of financial position.
Inland Revenue is also investigating whether or not to adopt hedge accounting. This decision will depend on whether or not the cost of adopting hedge accounting will outweigh the benefit.
Employee benefits
NZ IAS 19 - Employee Benefits requires an entity to recognise accumulating compensated absences such as sick leave. Inland Revenue is currently in the process of determining the potential size of this provision. If material, a provision for sick leave will be provided.
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 but on transition to NZ IFRS will be required to do so.
Date published: 09 Aug 2006
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