Skip to main content

Budget 2024: The Government has announced FamilyBoost, a proposed new childcare payment to help eligible families with the rising costs of Early Childhood Education (ECE). Find out more:

(References to surplus and deficit in this note refer to the surplus and deficit of the ‘Financial Statements of the Government of New Zealand’).

On 12 May 2020, the Government opened the Small Business Cashflow (loan) Scheme to assist small-to-medium-sized businesses impacted by COVID-19. The scheme is administered by Inland Revenue and provides loans of up to $100,000 to businesses employing 50 or fewer full-time equivalent employees for a maximum loan term of 5 years. Eligible businesses can borrow $10,000 plus an additional $1,800 per equivalent full-time employee. To be eligible for the loans, borrowers need to declare that they are a viable business, and that they will use the money for core business operating costs.

On 9 November 2020, the scheme was extended to 31 December 2023 and the interest-free conditions were extended from 1 year to 2 years, including pre-existing loans.

Loans are interest-free if they are paid back within 2 years. Otherwise, the interest rate will be 3% per annum for a maximum term of 5 years.

Repayments are not required for the first two years, but voluntary payments can still be made over this period. During months 25 to 60, regular principal and interest payments are required to be paid on outstanding balances.

Inland Revenue holds the total nominal debt, administers the initial fair value write-down expense and any subsequent fair value adjustments, and is responsible for collecting the loan.

Small Business Cashflow Scheme loans are designated at fair value through surplus or deficit under PBE IFRS 9 Financial Instruments.

The difference between the amount of the loan and the fair value on initial recognition is recognised as an expense.

The initial fair value is lower than the amount of the initial loan for a number of reasons, including that:

  • repayments are not required for the first 2 years
  • the time value of money will erode the value of future repayments, because there is no interest charged in the first 2 years
  • the interest rate of 3% charged is lower than the market interest rates for loans to small-to-medium-sized businesses
  • borrowers may default on their obligations.

At the end of the year, actuarial and predictive models are used to compare the carrying value to the fair value of the loan portfolio and the difference will be recognised in the surplus and deficit of the ‘Financial Statements of the Government of New Zealand’.

We use the following key terms to help us define loan values.

  • Fair value - The market value of loans if they could be exchanged between knowledgeable, willing parties in an arm’s-length transaction.
  • Nominal value - The total amount owed by borrowers at a point in time, including loan principal, interest, fees and penalties.

The nominal and fair values of loans are shown below.

A breakdown of the fair value remeasurement - Small Business Cashflow Scheme loans reported in the Schedule of non-departmental gains and losses is set out below.

Financial instruments - fair value hierarchy disclosures

For those instruments recognised at fair value in the ‘Schedule of non-departmental assets’, fair values are determined according to the following hierarchy:

  • quoted market price (level 1) - financial instruments with quoted prices for identical instruments in active markets
  • valuation technique using observable inputs (level 2) - financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable
  • valuation techniques with significant non-observable inputs (level 3) - financial instruments valued using models where one or more significant inputs is not observable.

Schedule of non-departmental assets

Inland Revenue’s financial assets as at 30 June 2021 were valued using significant non-observable inputs (level 3). There are no quoted market prices (level 1) and no observable inputs (level 2).

The following table analyses the basis of the valuation of classes of financial instruments measured at fair value in the Schedule of non-departmental assets.

The next section provides details on the model, and the table outlines the significant assumptions and sensitivities for the level 3 valuation technique.

Small Business Cashflow (loan) Scheme valuation model, significant assumptions and uncertainties

At the end of the year, the Small Business Cashflow (loan) Scheme is valued by an independent external valuer using actuarial and predictive models. Inland Revenue provides data to the valuer on borrowing and repayments, and data on borrowers such as industry and region. The data is up to 30 June 2021.

The key assumptions in determining the $921 million fair value of Small Business Cashflow Scheme loans as at 30 June 2021 are the timing of principal and interest repayments and the default rate. The most critical assumption is the default rate of 29.4% which has been explicitly modelled for each industry sector and cross-checked by modelling using market discount rates. An additional cross-check was provided by applying banking capital requirements and a risk-weighted assets assumption to estimate the regulatory capital required for a bank owning these loans. This has enabled a calculation of the hypothetical fair value of the loans to a New Zealand bank.

As noted by the valuer, there are significant uncertainties in estimating the fair value of the scheme. The key uncertainties include:

  • the scheme is new and there is limited data to determine the likely repayment default experience
  • there are limited reference points to determine discount rates for discounting the cashflows
  • there are uncertainties from the impact of COVID-19 on the wider economy or on the specifics of the businesses receiving loans from the scheme
  • the uncertain and volatile nature of the future debt repayments.

The modelling and sensitivity analysis undertaken by the valuer notes a wide range of possible fair values, estimated to be +/- 20% of the fair value.

This can be expressed as a fair value between $600 million and $1.200 billion.

The significant assumptions and sensitivities behind the fair value are:

The loan portfolio is exposed to a variety of financial instrument risks, including credit risk and interest rate risk.

Credit risk

Credit risk is the risk that borrowers will default on their obligation to repay their loans, causing the scheme to incur a loss. The risk of default has been assumed to be equivalent to a C-grade investment.

The scheme does not require borrowers to provide any collateral or security to support advances made. As the total sum advanced is widely dispersed over a large number of borrowers, the scheme does not have any material individual concentrations of credit risk.

Inland Revenue will use a variety of activities that inform and assist customers to repay their loans and enforce compliance to reduce the risk of non-payment of obligations.

Interest rate risk

Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in interest rates.

Changes in interest rates impact discount rates. The risk is that if interest rates rise, the value of the scheme will significantly decrease as the discount rates applied to the expected future repayments will be higher, decreasing their value.

Changes in interest rates could also impact on the Government’s return on loans advanced. The interest rate attached to the loans is set by the Government.

Last updated: 03 Nov 2021
Jump back to the top of the page