Annual Report for the year ended 30 June 2009
Part 5: Non-departmental statements and schedules (continued)
Notes to the non-departmental financial statements
Note1: Statement of accounting policies for the year ended 30 June 2009
Reporting entity
These non-departmental schedules and statements present financial information on public funds managed by the Ministry on behalf of the Crown.
These non-departmental balances are consolidated into the Financial Statements of the Government. For a full understanding of the Crown's financial position, results of operations and cash flows for the year, reference should also be made to the Financial Statements of the Government.
Accounting policies
The non-departmental schedules and statements have been prepared in accordance with the Government's accounting policies as set out in the Financial Statements of the Government, and in accordance with relevant Treasury Instruments and Treasury Circulars.
Measurement and recognition rules applied in the preparation of these non-departmental schedules and statements are consistent with New Zealand generally accepted accounting practice as appropriate for public benefit entities. Reference should be made to the accounting policies, contained in note one to the departmental financial statements.
The following particular accounting polices have been applied.
Foreign exchange
Foreign currency transactions are translated into New Zealand dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the schedule of non-departmental income or expenses.
Goods and services tax
All items in the financial statements, including appropriation statements, are stated exclusive of GST, except for receivables and payables, which are stated on a GST inclusive basis. In accordance with Treasury instructions, GST is returned on revenue received on behalf of the Crown, where applicable. However, an input tax deduction is not claimed on non-departmental expenditure. Instead, the amount of GST applicable to non-departmental expenditure is recognised as a separate expense and eliminated against GST revenue on consolidation of the government financial statements.
Accounting for derivative financial instruments, hedging activities and foreign currency transactions
The Ministry uses derivative financial instruments to hedge exposure to foreign exchange. In accordance with its Foreign Exchange policy, the Ministry does not hold or issue derivative financial instruments for trading purposes. The Ministry has not adopted hedge accounting.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value at each balance date. Movements in the fair value of derivative financial instruments are recognised in the schedule of non-departmental income or schedule of non-departmental expenses, as appropriate.
Foreign currency transactions (including those for which forward exchange contracts are held) are translated into New Zealand dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the schedule of non-departmental income or schedule of non-departmental expenses, as appropriate.
Note 2: Debtors and other receivables
| Actual 2008 $000 | Actual 2009 $000 |
|
|---|---|---|
| Balance at 1 July |
- | - |
| Additional provisions made during the year |
- | - |
| Receivables written off during period |
- | - |
| Balance at 30 June | - | - |
The carrying value of debtors and other receivables approximates their fair value.
2008 |
2009 |
|||||
|---|---|---|---|---|---|---|
| Gross | Impairment | Net | Gross | Impairment | Net | |
| Not past due | 658 | - | 658 | 4,245 | - | 4,245 |
| Past due 1-90 days | 66 | - | 66 | - | - | |
| Past due 90-180 days | - | - | - | - | - | - |
| Past due 180-360 days | - | - | - | - | - | - |
| Past due > 360 days | - | - | - | - | - | - |
| Total | 724 | - | 724 | 4,245 | - | 4,245 |
Note 3: Creditors and other payables
| Actual 2008 $000 | Actual 2009 $000 |
|
|---|---|---|
| Creditors |
1,114 | 10,974 |
| Total creditors and other payables | 1,114 | 10,974 |
Creditors and other payables are non-interest bearing and are normally settled on 30-day terms, therefore the carrying value of creditors and other payables approximates their fair value.
Note 4: Explanation of major variances against budget
There are no significant variances to budget.
Note 5: Financial instruments risks
The Ministry's activities expose it to a variety of financial instrument risks, including market risk, credit risk and liquidity risk. The Ministry has a series of policies to manage the risks associated with financial instruments and seeks to minimise exposure from financial instruments. These policies do not allow any transactions that are speculative in nature to be entered into.
Market risk
Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
The Ministry purchases capital equipment internationally and is exposed to currency risk arising from various currency exposures, primarily with respect to the United States, Canadian and Australian dollars and Euro. Currency risk arises from future capital purchases and recognised liabilities, which are denominated in a foreign currency.
The Ministry's foreign exchange management policy requires the Ministry to manage currency risk arising from future transactions and recognised liabilities by entering into foreign exchange forward contracts to hedge the entire foreign currency risk exposure. The Ministry's policy has been approved by the Treasury and is in accordance with the requirements of the Treasury Guidelines for the Management of Crown and Departmental Foreign Exchange Exposure.
Interest rate risk
Interest rate risk is the risk that the fair value of a financial instrument will fluctuate or, the cash flows from a financial instrument will fluctuate, due to changes in market interest rates.
The Ministry has no interest bearing financial instruments and, accordingly, has no exposure to interest rate risk.
Credit risk
Credit risk is the risk that a third party will default on its obligation to the Ministry, causing the Ministry to incur a loss.
In the normal course of its business, credit risk arises from debtors, deposits with banks and derivative financial instrument assets.
The Ministry is only permitted to deposit funds and enter into foreign exchange forward contracts with approved counterparties. These entities have high credit ratings. For its other financial instruments, the Ministry does not have significant concentrations of credit risk.
The Ministry's maximum credit exposure for each class of financial instrument is represented by the total carrying amount of cash and cash equivalents, net debtors, and derivative financial instrument assets. There is no collateral held as security against these financial instruments, including those instruments that are overdue or impaired.
The Crown Retail Deposit Guarantee Scheme for deposits held with banks that have opted into the scheme provides a guarantee of $1 million per deposit or per guaranteed institution. Deposits beyond this level are not covered by this scheme.
Sensitivity analysis - Cash and cash equivalents
At 30 June 2009, if the NZ dollar strengthened by 5% against the major currencies held with all other variables held constant, the unrealised gain for the year would have been $7.080 million lower. Conversely, if the NZ dollar weakened by 5% against all hedged currencies with all other variables held constant, the unrealised gain for the year would have been $7.826 million higher.
Decrease in gain if NZ dollar strengthened by 5% ($000)
| 2008 | 2009 | |
|---|---|---|
| AUD | 369 | 646 |
| CAD | 52 | 635 |
| EUR | 533 | 3,786 |
| USD | 3,198 | 2,013 |
| 4,152 | 7,080 |
Increase in gain if NZ dollar weakened by 5% ($000)
| 2008 | 2009 | |
|---|---|---|
| AUD | 408 | 714 |
| CAD | 58 | 702 |
| EUR | 589 | 4,185 |
| USD | 3,534 | 2,259 |
| 4,589 | 7,826 |
Sensitivity analysis - Derivatives
At 30 June 2009, if the NZ dollar strengthened by 5% against all the hedged currencies with all other variables held constant, the unrealised loss for the year would have been $19.425 million lower. Conversely, if the NZ dollar weakened by 5% against all the hedged currencies with all other variables held constant, the unrealised loss for the year would have been $21.470 million higher. The movements are a result of the exchange losses on translation of overseas currencies.
Liquidity risk
Liquidity risk is the risk that the Ministry will encounter difficulty raising liquid funds to meet commitments as they fall due.
In meeting its liquidity requirements, the Ministry closely monitors its forecast cash requirements with expected cash drawdowns from the New Zealand Debt Management Office. The Ministry maintains a target level of available cash to meet liquidity requirements.
The table below analyses the Ministry's financial instruments that will be settled based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.
| Less than 6 months $000 | Between 6 months and 1 year $000 | Between 1 year and 5 years $000 | Over
5 years $000 | Total $000 |
|
|---|---|---|---|---|---|
| Assets Current assets |
|||||
| Cash and cash equivalents | 154,186 | - | - | - | 154,186 |
| Debtors and other receivables | 4,245 | - | - | - | 4,245 |
| Derivative financial instruments | 341,819 | - | - | - | 341,819 |
Total current assets |
500,250 | - | - | - | 500,250 |
| Non-current assets |
|||||
| Derivative financial instruments | - | - | 49,657 | - | 49,657 |
| Total non-current liabilities | - | - | 49,657 | - | 49,567 |
| Total assets | 500,250 | - | 49,657 | - | 549,907 |
| Liabilities Current liabilities |
|||||
| Creditors and other payables | 10,974 | - | - | - | 10,974 |
| Derivative financial instruments | 358,860 | - | - | - | 358,860 |
Total current liabilities |
369,834 | - | - | - | 369,834 |
| Non-current liabilities |
|||||
| Derivative financial instruments | - | - | 49,070 | - | 49,070 |
| Total non-current liabilities | - | - | 49,070 | - | 49,070 |
| Total liabilities | 369,834 | - | 49,070 | - | 418,904 |
| Net liquidity of continuing operations | 130,416 | - | 587 | - | 131,003 |
Note 6: Categories of financial instruments
| Actual 2008 $000 | Actual 2009 $000 |
|
|---|---|---|
| Loans and receivables |
||
| Cash and cash equivalents | 114,819 | 154,186 |
| Debtors and other receivables (note 2) |
724 | 4,245 |
| Total loans and receivables | 115,543 | 158,431 |
| Fair value through profit and loss - designated as such upon initial recognition |
||
| Derivative financial instruments assets | 1,654 | 727 |
| Derivative financial instruments liabilities |
20,609 | 17,181 |
| Financial liabilities measured at amortised cost |
||
| Creditors and other payables (note 3) | 1,114 | 10,974 |
Note 7: Derivative financial instruments
The notional principal amount of outstanding forward exchange contracts at 30 June 2009 was $410,949,316. These were EUR 165,096,117 and USD 23,148,000 and AUD 515,403.
The fair value of forward exchange contracts has been determined using a discounted cash flows valuation technique based on quoted market rates.
