Statement of Intent 2007-10: Part four - Forecast departmental financial statements and performance objectives

Statement of accounting policies
for the year ending 30 June 2008

REPORTING ENTITY

Inland Revenue is a government department as defined by the Public Finance Act 1989. It is a wholly owned entity of the Crown whose primary objective is to provide services for the community or social benefit rather than making a financial return. Accordingly, Inland Revenue has designated itself as a public benefit entity for the purpose of reporting under New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).

STATEMENT OF COMPLIANCE

The forecast 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 that the forecast figures for the year ending 30 June 2008 comply with NZ IFRS and other applicable Financial Reporting Standards, as appropriate for public benefit entities. However, the comparative figures for 2005/06 and 2006/07 have been prepared under current NZ GAAP. The significant accounting policies and forecast assumptions all relate to the forecast figures which have been prepared under NZ IFRS.

An explanation of how the transition to NZ IFRS has affected the reported financial position, financial performance, and cash flows of Inland Revenue is provided in note 1. This note includes reconciliations of current NZ GAAP to NZ IFRS for equity as at 1 July 2007.

The following is a list of accounting policies that have changed as a result of adopting NZ IFRS:

• Financial instruments
• Property, plant and equipment
• Intangible assets
• Employee benefits
• Leases (operating lease incentives)
• Inventories.

Where the treatment under current NZ GAAP differs from that under NZ IFRS there is a short explanation of the differences after the applicable accounting policy.

BASIS OF PREPARATION

The accounting policies set out below have been applied consistently to the forecast financial statements.

The reporting period for the forecast financial statements is for the year ending 30 June 2008. 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.

These forecast financial statements comply with NZ IFRS.

ACCOUNTING POLICIES

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

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.

Goods and services tax (GST)

All items in the financial statements are stated exclusive of GST, except for receivables and payables, 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 amount of GST owing to or due from Inland Revenue (as tax administrator) at balance date, being the difference between output GST and input GST, is included in creditors and payables or debtors and receivables (as appropriate) in the Statement of Financial Position.

Taxation

Government departments are exempt from the payment of income tax under the Income Tax Act 1994. Accordingly, no charge for income tax has been provided for.

Revenue

Inland Revenue derives revenue through the provision of outputs to the Crown, other government agencies, 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:

a) Sale of services
Sale of services are recognised in the accounting period in which the services are rendered, by reference to completion of specific transaction, assessed on the basis of actual services provided as a proportion of the total services to be provided.

b) 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.

Capital charge

Inland Revenue pays capital charge to the Crown on taxpayers' funds as at 30 June and 31 December each year. The capital charge rate for the year ending 30 June 2008 is assumed to be set at the same rate as 30 June 2007 of 7.5% per annum.

Leases

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to the 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 - leases 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.

Any contractual arrangements deemed to be operating leases are recognised during the reporting period.

Under current NZ GAAP lease incentives are recognised immediately in the Statement of Financial Performance.

Foreign currency

Foreign currency transactions are translated into the functional currency 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.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and bank accounts. All cash held in bank accounts is held on demand and no interest is payable to Inland Revenue.

Inventories held for distribution

Inventories held for distribution comprise forms, booklets and returns 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.

Under current NZ GAAP inventories are not recognised as an asset. All costs incurred are expensed when incurred.

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.

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.

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 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. The amount of the provision is the difference between the asset's carrying amount and estimated nominal value of the impairment. The impairment losses are 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 less than 12 months are recognised at their nominal value, unless the effect of discounting is material. "Other payables" are recognised at their nominal value as the effect of discounting is immaterial.

Financial instrument risks

Inland Revenue has policies in place to manage the risks associated with financial instruments and, being risk averse, seeks to minimise exposure from its treasury activities. Inland Revenue does not enter into transactions that are speculative in nature.

Fair value
The fair value of all financial instruments is equivalent to the carrying amount disclosed in the Statement of Financial Position. The fair value of accounts payable and accounts receivable is their nominal value. Forward exchange contracts are valued using published forward exchange rates.

Currency risk
Currency risk is the risk that the debtor or creditor amounts due in foreign currency, will fluctuate because of changes in foreign exchange rates. Inland Revenue uses foreign currency forward exchange contracts to manage foreign exchange exposures when single foreign exchange transactions exceed $NZ100,000, or the transaction exposure for an individual currency exceeds $NZ100,000. As there is no significant exchange risk a sensitivity analysis has not been undertaken.

Interest rate risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to market interest rates.

Under the Public Finance Act 1989 Inland Revenue cannot raise a loan without Ministerial approval and no such loans have been raised. Accordingly, there is no interest rate exposure for funds borrowed.

Credit risk
Credit risk is the risk that a third party will default on its obligations to Inland Revenue, causing a loss to be incurred. In the normal course of its business credit risk from trade debtors is concentrated with the Crown and other government agencies.

The carrying amount of financial assets recognised in the Statement of Financial Position best represents Inland Revenue's maximum exposure to credit risk at balance date.

Inland Revenue does not require any collateral, security, or other credit enhancements to support financial instruments with financial institutions that Inland Revenue deals with, or the New Zealand Debt Management Office, as these entities have high credit ratings. For its other financial instruments, Inland Revenue does not have significant concentrations of credit risk.

The carrying amount of financial assets that would otherwise be past due or impaired because terms have been renegotiated is not material.

Liquidity risk
Liquidity risk is the risk that there will be insufficient liquid assets to meet liabilities due. As all but an insignificant proportion of funds come from the NZ Government and cash is drawn down on a monthly basis, Inland Revenue does not have significant liquidity risk.

Under current NZ GAAP Inland Revenue does not recognise foreign currency forward exchange contracts in the Statement of Financial Position. These derivatives have been measured at fair value under NZ IFRS and recognised.

Property, plant and equipment

Inland Revenue has operational assets. They include leasehold improvements, IT equipment, furniture and office equipment, and motor vehicles.

The capitalisation thresholds are:

Leasehold improvements	$20,000 and over
IT equipment computers and laptops	All
IT equipment – other	$2,000 and over
Furniture and office equipment	$2,000 and over
Motor vehicles	$2,000 and over
Group assets	$20,000 and over

Property, plant and equipment are shown at historical cost less accumulated depreciation and impairment. 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 costs 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 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 life of major classes of assets have been estimated as follows:

Leasehold improvements	1 to 7 years
IT equipment	3 to 5 years
Furniture and office equipment	5 to 7 years
Motor vehicles	5 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, 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 carrying amounts. These are included in the Statement of Financial Performance.

Intangible assets

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 licenses–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 probably 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 licenses - purchased
Intangible assets acquired by Inland Revenue such as computer software and licenses are stated at cost less accumulated amortisation and impairment losses. Acquired computer software and licenses 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:

Software - developed	$50,000 and over
Software and licenses - purchased	$5,000 and over
Business process design	$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 live. 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:

Software - developed	5 to 7 years
Software and licenses - purchased	5 to 7 years
Business process design	5 to 10 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 asset's 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 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 are recognised in the Statement of Financial Performance when the asset is derecognised.

Under current NZ GAAP software is recognised in "property, plant and equipment."

Provisions

Inland Revenue recognises a provision for future expenditure of uncertain amount or timing when there is a present obligation (either legal or constructive) as a result of a past event, it is probable that expenditures 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.

Provision for onerous contracts

Provision for onerous contracts are obligations that have arisen under non-cancellable leases for properties not occupied. These properties are sub-leased, but the obligations to pay rental expenses are in excess of rental income from subleases. The provisions are recognised as the net of expected rental expense and expected rental income. These noncancellable operating leases will expire 31 January 2009.

Employee 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, and retiring, long service leave and sick leave entitlements expected to be settled within 12 months.

Employee benefits that are payable beyond 12 months, such as long-service leave, retiring leave and sick leave have been calculated on an actuarial basis, based on the present value of the estimated future cash outflows.

Superannuation plans

There are 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. Defined benefit plans are post-employment benefit plans other than defined contribution plans.

For defined contribution plans, Inland Revenue pays contributions to privately and publicly administered plans on a contractual and mandatory basis, respectively. Once the contributions have been paid, Inland Revenue has no further payment obligations. The obligations for contributions to defined contribution plans 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 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.

Under current NZ GAAP sick leave is not recognised in the Statement of Financial Position.

Taxpayers' funds

This is the Crown's net investment in Inland Revenue. It is measured as the difference between total assets and total liabilities.

Statement of forecast cash flows

The following are the definitions used in the Statement of Forecast Cash Flows:

• Cash is considered to be cash on hand and 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 contracts that have been entered into at balance date are disclosed as commitments to the extent that they are equally unperformed obligations. Commitments are recorded in the Statement of Commitments.

 

 

Date published: 25 Jun 2007

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