Statement of Intent 1 July 2007 - 30 June 2010
Part 2: Departmental forecast report
Financial highlights
| Budgeted 2006/07 $000 |
Estimated actual 2006/07 $000 |
Budget 2007/08 $000 |
|
|---|---|---|---|
| Revenue: Crown | 9,502 | 9,502 | 9,398 |
| Revenue: Other | 455 | 424 | 144 |
| Output expenses | 9,957 | 9,926 | 9,542 |
| Net surplus | - | - | - |
| Taxpayers' funds | 3,416 | 3,416 | 3,416 |
| Net cash flows from operating, investing and financing activities | (668) | (610) | (60) |
Details of what the appropriations will be spent on appear in Parts B1, C1 and E of Vote Defence in the 2007/08 Estimates.
Statement of significant underlying assumptions
The Ministry of Defence is a government department as defined by the Public Finance Act 1989.
The Ministry's forecast financial statements have been prepared in accordance with the Public Finance Act 1989, and generally accepted accounting practice.
For the purposes of financial reporting the Ministry of Defence is a public benefit entity.
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 2007 were used in these forecast statements
- the 2007/08 forecast information will be updated as part of the government budget process.
Please note that the actual financial results achieved for the period covered are likely to vary from the information presented, and that the variations may be material.
Statement of significant accounting policies
Reporting Period
The reporting period for these forecast financial statements is the year ended 30 June 2008.
Basis of preparation
These forecast financial statements have been prepared in accordance with New Zealand generally accepted accounting practice (NZ GAAP). They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for public benefit entities.
These are the Ministry of Defence's first forecast financial statements complying with NZ IFRS and NZ IFRS 1 has been applied. On 1 July 2007 the Ministry will adopt New Zealand equivalents to IFRS for the first time. This requires retrospective application of all NZ IFRS to comparative information.
An explanation of how the transition to NZ IFRS has affected the reported financial position, financial performance, and cash flows of the Ministry of Defence is provided in the accounting policies below.
The non-departmental balances are consolidated into the Financial Statements of Government therefore readers of these statements and schedules should also refer to the Financial Statements of Government for 2007/08.
These forecast financial statements are presented in New Zealand dollars rounded to the nearest thousand.
Accounting Policies
The accounting policies set out below have been applied consistently to all periods presented in these forecast financial statements and in preparing an opening NZ IFRS balance sheet as at 1 July 2006 for the purposes of the transition to NZ IFRS.
The measurement base applied is historical cost modified by the revaluation of certain assets and liabilities as identified in this statement of accounting policies.
The accrual basis of accounting has been used unless otherwise stated.
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 transfers made by Order in Council under section 26 of the Public Finance Act 1989.
Revenue
Operations
The Ministry derives department 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.
Receivables are recorded at estimated realisable value, after providing for doubtful and uncollectible debts.
Non-departmental military equipment is sold to the New Zealand Defence Force in July and January each year. Revenue is recognised and reported in those months.
Interest
Interest income is recognised in the period in which it is earned.
Cost allocation
The Ministry derives the cost of outputs using a cost allocation system that 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 class will treat the expense as a direct cost to the output class even though a specific job within the output class 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 output classes on a predetermined percentage for each expense item. The percentage number is an assessment of services to be provided to each output class in the ensuing year.
Expenses
Expenses are recognised when incurred and are reported in the financial period to which they relate.
Foreign Currency
Department
Monetary assets and liabilities denominated in foreign currencies are translated to New Zealand dollars at the spot rate at balance date. Foreign exchange gains or losses arising from translation of monetary assets and liabilities are recognised in the Statement of Forecast Financial Performance.
Non Departmental
Monetary assets and liabilities denominated in foreign currencies are translated to New Zealand dollars at the spot rate at balance date. Foreign exchange gains or losses arising from translation of monetary assets and liabilities are recognised in the schedule of non-departmental forecast expenses.
Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies are measured at spot rate and are translated into New Zealand dollars at the exchange rate applicable at the fair value date. The associated foreign exchange gains or losses are recognised in the schedule of non-departmental forecast expenses.
Derivatives
The Ministry has foreign exchange forward contracts, which are derivatives.
The fair value of the derivatives will be disclosed in the non-departmental schedules, as either a derivative in gain or a derivative in loss, depending on the value at reporting date.
Financial Instruments
Financial Assets
Financial assets are recorded at fair value with any realised and unrealised gains or losses recognised in the Statement of Forecast Financial Performance for department or the schedule of non-departmental expenses for non-departmental. Transaction costs are expensed as they are incurred.
Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with a maturity of no more than 3 months from the date of acquisition.
Financial Liabilities
Financial liabilities are recorded at fair value with any realised and unrealised gains or losses recognised in the Statement of Forecast Financial Performance for department or the schedule of non-departmental expenses for non-departmental. Transaction costs are expensed as they are incurred.
Financial liabilities entered into with duration less than 12 months are recognised at their nominal value.
Hedging
Transactions between entities within the Government reporting entity do not qualify for hedge accounting in the financial statements of the Government. Where a derivative is used to hedge the foreign exchange exposure of a monetary asset or liability, the effects of the hedge relationship are automatically reflected in the schedule of non-department expenses, so hedge accounting is not necessary.
Property, Plant & Equipment
Items of property, plant and equipment are recorded at cost less accumulated depreciation and less any impairment losses.
Realised gains and losses arising from disposal of property, plant and equipment are recognised in the statement of forecast financial performance in the period in which the transaction occurs. Any balance attributable to the disposed asset in the asset revaluation reserve is transferred to taxpayers' funds.
The carrying amounts of property, plant and equipment are reviewed at least annually to determine if there is any indication of impairment. Where an 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. Losses resulting from impairment are reported in the Statement of Forecast Financial Performance, unless the asset is carried at a re-valued amount in which case any impairment loss is treated as a revaluation decrease.
Depreciation
Depreciation is charged on a straight-line basis at rates calculated to allocate the cost or valuation of an item of property, plant and equipment, less any estimated residual value, over its estimated useful life. The estimated useful lives of different classes of property, plant and equipment are:
- Office equipment 3 – 10 years
- Office furniture 5 – 10 years
- Computer equipment 3 years
- New Building 7 – 50 years
- Information management systems 5 years
Intangible Assets
Computer software that is not integral to the operation of the hardware is recorded as an intangible asset and amortised on a straight-line basis over a period of three years.
Impairment
The Ministry considers at each reporting date whether there is any indication that a non-financial asset may be impaired. If any such indication exists, the asset's recoverable amount is estimated. Given that the future economic benefits of the Ministry's assets are not directly related to the ability to generate net cash flows the value in use of these assets is measured on the basis of depreciated replacement cost.
At each balance date financial assets such as receivables are assessed for impairment. The recoverable amount is the present value of the estimated future cash flows.
An impairment loss is recognised in the Statement of Forecast Financial Performance whenever the carrying amount of an asset exceeds its recoverable amount. Any reversal of impairment losses is also recognised in the income statement.
Work in progress
Non-departmental work in progress comprises project expenditure to be recovered from the New Zealand Defence Force for the six months preceding balance date, plus accruals at balance date.
Cash and cash equivalents
Cash and cash equivalents means cash balances on hand, held in bank accounts in which the Ministry invests as part of its day-to-day cash management. This includes short term deposits held by the Ministry that have maturities less than or equal to three months.
Employee Entitlements
Provision is made in respect of the Ministry's liability for annual, sick, long service and retirement leave.
Entitlements to be paid within twelve months of the reporting date are measured at nominal values on an actual entitlement basis, at current rates of pay.
Entitlements payable beyond twelve months, such as long service and retirement leave, are calculated on an actuarial basis based on the present value of expected future entitlements.
Commitments
Future payments are disclosed as commitments at the point a contractual obligation arises, to the extent that there are equally unperformed obligations.
Commitments relating to employment agreements are not disclosed.
Other Liabilities and Provisions
Other liabilities and provisions are recorded at the best estimate of the expenditure to settle the obligation. Liabilities and provisions to be settled beyond 12 months are recorded at their present value.
Contingent Liabilities and Contingent Assets
Contingent liabilities and contingent assets are recorded in the Statement of Contingent Liabilities and Contingent Assets at the point at which the contingency is evident.
Contingent liabilities are disclosed if the possibility that they will crystallise is not remote.
Contingent assets are disclosed if it is probable that the benefits will be realised.
Statement of forecast cash flows
Cash means balances on hand and 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.
Goods and Services Tax (GST)
The statement of unappropriated expenditure is inclusive of GST. The statement of departmental expenditure and appropriations, and the statement of forecast financial position are exclusive of GST except for creditors and payables, and debtors and receivables, which are GST inclusive. All other statements are GST exclusive.
The amount of GST owing to or from the Inland Revenue Department at balance date, being the difference between output GST and input GST, is included in creditors and payables or debtors and receivables as appropriate.
The statement of forecast cash flows has been prepared on a net GST basis. That is, cash receipts and payments are presented exclusive of GST. A net GST presentation has been chosen to be consistent with the presentation of the statement of forecast financial performance and statement of forecast financial position. The net GST component of operating activities reflects the net GST paid to and received from the Inland Revenue Department. The GST component has been presented on a net basis as the gross amount would not provide meaningful information for the financial statement purposes.
Non-departmental GST on the procurement or refurbishment of military equipment is expensed.
Income Tax
Government departments are exempt from the payment of income tax under the Income Tax Act 2004. 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
Accounting policies are changed only if the change is required by a standard or interpretation or otherwise provides more reliable and more relevant information.
There have been no changes in accounting policies since the date of the last audited financial statements prepared under NZ GAAP, other than the impact of adoption of NZ IFRS (see note below).
All policies have been applied on a basis consistent with the previous year.
Comparatives
When presentation or classification of items in the forecast financial statements is amended or accounting policies are changed voluntarily, comparative figures are restated to ensure consistency with the current period unless it is impracticable to do so.
Impact of adoption of New Zealand International Financial Reporting Standards (NZ IFRS)
On 1 July 2007 the Ministry will adopt New Zealand equivalents to IFRS for the first time. This requires retrospective application of all NZ IFRSs to comparative information. Because there is no material change in equity or profit between previous NZ GAAP and NZ IFRS no reconciliation of previous NZ GAAP to NZ IFRS figures is required.
The changes arising from the adoption of NZ IFRS are as follows:
Statement of forecast financial performance
Other than presentational changes, the change to NZ IFRS has not impacted the statement of forecast financial performance.
Statement of forecast financial position
Software that is not integral to the running of computer hardware has been reclassified as a separate intangible.
Statement of forecast cash flows
Other than presentational changes, the change to NZ IFRS has not impacted the statement of forecast cash flows.
Non-departmental schedules
The fair value of the derivative has been disclosed in the non-departmental schedules, as either a derivative in gain or a derivative in loss depending on the value at reporting date.
Transactions in foreign currencies have been translated at the spot rate at the date of the transaction into New Zealand dollars. Any gain or loss resulting from the difference between the foreign exchange forward contract rate and the spot rate on date of settlement has been recognised in the Schedule of non-departmental expenses.
