Statement of Intent 2007-10: Part five - Forecast financial schedules - Crown as administered by Inland Revenue
Statement of accounting policies and forecast assumptions
for the year ending 30 June 2008
REPORTING ENTITY
Inland Revenue is a government department as defined by the Public Finance Act 1989 and these forecast financial schedules have been prepared pursuant to this Act.
Inland Revenue is a wholly owned entity of the Crown. Its 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).
Inland Revenue administers activities on an agency basis on the Crown's behalf. These activities comprise elements of income, expenditure, assets, liabilities and cash flow, which form part of the consolidated forecast financial schedules of government.
The forecast financial schedules have been prepared by Inland Revenue and represent extract information of the Crown activities which are administered by Inland Revenue. They are based on the accounting policies and assumptions that follow. As with all such assumptions there is a degree of uncertainty surrounding them which increases as the forecast horizon extends.
The schedules have been prepared pursuant to the Public Finance Act 1989 and in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all Government decisions and circumstances communicated to 31 March 2007.
STATEMENT OF COMPLIANCE
The forecast 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 that the forecast figures for the period 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 2006 and 2007 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 the Government Reporting Entity is provided in note 3. This note includes reconciliations of previous NZ GAAP to NZ IFRS for equity as at 1 July 2007.
The following accounting policy has changed as a result of adopting NZ IFRS:
- Financial instruments
Where the treatment under current New Zealand GAAP differs from that under NZ IFRS there is a short explanation of the differences after the applicable accounting policy.
BASIS OF PREPARATION
The reporting period for the forecast financial schedules is for the year ending 30 June 2008.
The forecast for 30 June 2008 has generally been prepared using actual data to 31 March 2007. Transactions for the remainder of the 2007 year and for the 2008 year are forecast in accordance with the Crown's accounting policies and forecast assumptions.
The accounting policies set out below have been applied consistently to the forecast financial schedules.
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 statements are presented in New Zealand dollars and all values are rounded to the nearest million dollars ($000,000). 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.
These forecast financial schedules comply with NZ IFRS.
ACCOUNTING POLICIES
The following accounting policies below materially affect the measurement of financial results and financial position, and have been applied.
Revenue
Taxation receipts
The Crown provides many services and benefits that do not give rise to revenue. Further, payment or 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.
Other revenue earned relates to third party income such as reparation payments awarded by the courts in respect of civil debt.
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 his rate to the principle outstanding to determine interest income each period.
| Revenue type | Revenue recognition point |
|---|---|
| Source deductions (PAYE) | 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 (FBT) | When benefits are provided that give rise to FBT |
| Provisional tax** | Provisional tax is recognised in the period which it is earned |
| Terminal tax** | Assessment filed date |
| Goods and services 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 principal outstanding to determine interest income each period.
Expenses
Interest expense
Interest expense is accrued using the effective interest rate method. The effective interest rate exactly discounts estimated future cash payments through the expected life of the financial liability to that liability's net carrying amount. The method applies this rate to the principal outstanding to determine interest expense each period.
Cash and cash equivalents
Cash and cash equivalents include cash on hand; cash in transit, bank accounts and deposits with a maturity of no more than three months from date of acquisition.
Financial instruments
Financial assets
Receivables and advances ie general taxation, student loans 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. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired. Interest and impairment losses are recognised in the Schedule of Financial Performance.
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 Schedule of Financial Performance.
Fair values have been calculated using a model constructed for the Inland Revenue. This model applies a number of assumptions on future repayment behaviour as well as economic assumptions such as the discount rate and inflation. As such, the estimated fair value of the existing and new receivables at initial recognition is sensitive to changes in these assumptions.
There is a one-off write down in 2006-07 of the existing stock of receivables to fair value. This is recognised as an expense in 2006-07.
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.
Schedule of forecast cash flows
The following are the definitions used in the schedules of forecast cash flows:
- Cash is considered to be cash on hand and held in bank accounts.
- Operating activities include cash received from and disbursed to taxation and other activities undertaken as agent of the Crown.
- Investing activities are activities relating to the repayment of student loans.
- Financing activities are activities relating to the income equalisation scheme.
Contingent liabilities
Contingent liabilities are recorded in the Schedule of Contingent Liabilities at the point at which the contingency isevident. Contingent liabilities are disclosed if the possibility thatthey will crystallise is not remote.
Date published: 22 Jun 2007
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