Statement of Intent 1 July 2006 - 30 June 2009
Part 2: Departmental forecast report
Financial highlights
| 2005/06 Budgeted $000 |
2005/06 Estimated actual $000 |
2006/07 Budget $000 |
|
|---|---|---|---|
| Revenue: Crown | 9,075 | 8,673 | 9,502 |
| Revenue: Other | 469 | 469 | 144 |
| Output expenses | 9,544 | 9,142 | 9,646 |
| Net surplus | - | - | - |
| Taxpayers' funds | 1,555 | 1,555 | 3,416 |
| Net cash flows from operating, investing and financing activities | (506) | (493) | (769) |
- Revenue Crown is forecast to increase $427,000 due to additional depreciation and increased capital charge on the Ministry's share of the new defence building in Wellington.
- Revenue Other is forecast to decrease due to pre-acquisition cost budgets for 2006/07 not being determined until July 2006.
- Taxpayers' funds will increase by capital injections of $1,861,000 during 2006/07 required to meet the Ministry's share of the new defence building in Wellington.
Details of what the appropriations will be spent on appear in Parts B1, C1 and E of Vote Defence in the 2006/07 Estimates.
Statement of significant underlying assumptions
The Ministry of Defence is a government department as defined by section 2 of the Public Finance Act 1989.
The Ministry's financial statements have been prepared in accordance with section 38 of the Public Finance Act 1989, and generally accepted accounting practice.
In addition, the Ministry has reported the Crown activities which it administers.
Key assumptions underlying this forecast are:
- the statements have been compiled on the basis of government policies and the Ministry's agreement with the Minister of Defence at the time the statements were finalised
- the Ministry has accepted historical cost as a measurement base
- there will be no significant change in the level of output expense delivery
- staff numbers and operating costs will not vary significantly
- foreign currency project commitments and forecasts are translated to New Zealand dollars at a Ministry global rate. The global rate for each currency is determined from an average of all foreign currency forward contract rates, the actual cost of foreign currency held at the bank and the market spot rate. The global rates at March 2006 were used in these forecast statements
- the 2006/07 forecast information will be updated as part of the government budget process.
Statement of significant accounting policies
Accounting Policies
The following particular accounting policies which materially affect the measurement of financial results and financial position have been applied:
Budget Figures
The Budget Figures are those presented in the Budget Estimates (Main estimates) and those amended by the Supplementary Estimates (Supp. estimates) and any transfer made by Order in Council under section 26A of the Public Finance Act 1989.
Revenue Recognition
The Ministry derives revenue through the provision of outputs to the Crown and for services to third parties. Such revenue is recognised when earned and is reported in the financial period to which it relates.
Interest Income
Interest income is recognised in the period in which it is earned.
Receivables
Receivables are recorded at estimated realisable value, after providing for doubtful debts and uncollectable debts.
Cost Accounting
The Ministry has derived the costs of outputs using a cost allocation system, which is outlined below:
- Criteria For Direct and Indirect Costs
"Direct costs" are those costs directly attributed to an output.
"Indirect costs" are those costs that cannot be identified in an economically feasible manner with a specific output. - Direct Costs Assigned to Outputs
Direct costs are assigned to outputs by charging payments to specific job numbers. Selection of a "general cost" job number within an output will treat the expense as a direct cost to the output expense even though a specific job within the output expense has not been identified. - Basis for Assigning Indirect and Corporate Costs to Outputs
Indirect costs are assigned to outputs by charging payments to a corporate job number. The accounting system is programmed to allocate corporate job costs to the three outputs on a predetermined percentage for each expense item. The percentage number is a subjective assessment of services to be provided to each output in the ensuing year. The percentage numbers remain constant for the financial year.
Expenses
Expenses are recognised when incurred and are reported in the financial period to which they relate.
Property, Plant and Equipment
All fixed assets costing more than $5,000 are capitalised and recorded at cost. Any write-down of an item to its recoverable amount is recognised in the statement of financial performance.
Depreciation
Depreciation is provided on a straight-line basis at a rate, which will write off the cost (or valuation) of the assets to their estimated residual value over their useful lives.
The useful lives of asset categories have been estimated as follows:
Office equipment: 3-10 years
Office furniture: 5-10 years
Computer equipment: 3 years
Information management systems: 5 years
The cost of leasehold improvements is capitalised and depreciated over the estimated remaining useful life of the improvement.
Employee Entitlements
Provision is made in respect of the Ministry'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 retirement leave, have been calculated on an actuarial basis based on the present value of expected future entitlements.
Statement of Cash Flows
Cash means balances on hand, held in bank accounts.
Operating activities include cash received from all income sources of the Ministry 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 Currencies
Foreign currency transactions are converted into New Zealand dollars at the exchange rate at the date of the transaction. Where a forward exchange contract has been used to establish the price of a transaction, the forward rate specified in that foreign exchange contract 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.
Monetary assets and liabilities are translated to New Zealand dollars at the closing exchange rate. The resulting unrealised exchange gain or loss is recognised in the statement of financial performance. Other exchange gains or losses, whether realised or unrealised, are recognised in the statement of financial performance in the period to which they relate.
Financial Instruments
The Ministry is party to financial instruments as part of its normal operations. These financial instruments include bank accounts, short-term deposits, debtors, creditors and foreign currency forward contracts. The Ministry enters into foreign currency forward contracts to hedge currency transactions. Any exposure to gains or losses on those contracts is generally offset by a related loss or gain on the item being hedged. Apart from foreign currency forward contracts, all financial instruments are recognised in the statement of financial position and all revenues and expenses in relation to financial instruments are recognised in the statement of financial performance.
Except for those items covered by a separate accounting policy all financial instruments are shown at their estimated fair value.
Taxation
Government departments are exempt from the payment of income tax in terms of the Income Tax Act 1994. Accordingly, no charge of income tax has been provided for.
Taxpayers' Funds
This is the Crown's net investment in the Ministry.
Changes in Accounting Policies
No changes in accounting policies are expected to be made during the forecast period.
