About us
Part 2: Forecast financial performance, policies and statements
The following section describes the Corporation's financial structure, financial performance indicators, financial accounting policies and forecast financial statements.
These statements have been compiled on the basis of government policies at the time they were finalised. The forecast financial statements comply with generally accepted accounting practice and the Crown Entities Act 2004.
In this section, 'Parent' refers to Housing New Zealand Corporation as a discrete entity. 'Group' refers to Housing New Zealand Corporation and its subsidiaries. The principal subsidiary of Housing New Zealand Corporation is Housing New Zealand Limited, which owns and manages the state housing portfolio.
The measurement base applied is modified historical cost and the accrual basis of accounting has been used to prepare these statements. These statements have been prepared on a going-concern basis.
The forecast financial statements do not include the expected impact of future changes in property valuations, which are undertaken annually. The property valuation changes can have a significant impact on the forecast financial statements.
The Corporation's output costs in these statements are derived from the cost allocation system outlined below.
Cost allocation policy
Direct costs are charged directly to key activities. Support and indirect costs are charged to business group activities, based on cost drivers and related activity use.
Criteria for direct, support and indirect costs
Direct costs are those costs directly attributed to a strategic priority. Support costs relate to activities, where a strong link is known. Indirect costs are corporate costs that cannot be linked with a specific strategic priority in an economically-feasible manner.
Direct costs assigned to strategic priorities
Direct costs are charged directly to the strategic priorities' key activities. This includes significant costs, such as interest, property depreciation and rates. Personnel and other operating costs are charged to activities on the basis of pre-determined ratios established through the analysis of business units.
Basis for assigning support and indirect costs
Support costs are assigned to business groups on the basis of the proportion of the services consumed. Indirect (corporate overhead) costs are assigned to the strategic priority key activities on the basis of the full-time staff equivalents that are engaged in these key activities.
The Corporation is required by legislation to operate in a business-like manner when managing Crown resources. Through its financial frameworks, the Corporation aims to provide good financial oversight and stewardship, and efficient and effective management of assets and liabilities. It ensures investment decisions relating to the total portfolio maintain or improve financial performance.
The following table summarises the forecast financial performance of the Group. Full forecast financial statements follow at the end of this section.
| Parent Budget 2006/07 $000 |
Group Budget 2006/07 $000 |
Group Budget 2007/08 $000 |
Group Budget 2008/09 $000 | |
|---|---|---|---|---|
| Total operating revenue | 183,705 | 812,227 | 833,855 | 848,458 |
| Total direct costs | 53,537 | 517,161 | 537,425 | 557,032 |
| Interest costs | 21,603 | 128,685 | 130,399 | 132,091 |
| Other indirect costs | 94,187 | 87,420 | 88,352 | 90,398 |
| Operating surplus before tax | 14,378 | 78,961 | 77,679 | 68,937 |
| Income tax expense/(benefit) | (28,889) | 59,459 | 59,227 | 56,118 |
| Net surplus after tax | 43,267 | 19,502 | 18,452 | 12,819 |
The Corporation will use the following indicators to measure its financial performance.
- Net surplus after tax
This measure indicates how profitable we have been. The net surplus after tax is required to be returned to the Crown as a dividend each year, unless the responsible ministers agree that it is retained in the Corporation.
- Earnings before interest, tax, depreciation, amortisation and leasing (EBITDAL) to income percentage
This measure indicates how efficiently the Corporation manages its costs. It is calculated as total operating revenue less total costs (excluding interest, depreciation, amortisation, leasing and tax), over total operating revenue.
- EBITDAL per property managed (real $)
This is a commercial indicator of financial performance. It is calculated as total operating revenue less total costs (excluding interest, depreciation, amortisation, leasing and tax) divided by equity.
- EBIT/net interest ratio
This measure indicates whether the Corporation's debt to equity ratio will be likely to require adjustment.
- Administration cost per property and the number of full-time staff (FTEs) per 1,000 properties managed (real $)
These ratios are an indication of how efficiently the Corporation's properties are managed.
- Credit rating
This is Standard & Poors' assessment of the Corporation's financial strength - its ability to pay its debts.
| 2006/07 | 2007/08 | 2008/09 | |
|---|---|---|---|
| Net surplus after tax $000 | 19,502 | 18,452 | 12,819 |
| EBITDAL to income % | 53% | 53% | 52% |
| EBITDAL per property managed (real $) | 5,235 | 5,205 | 5,084 |
| EBIT:net interest ratio | 1.68:1 | 1.67:1 | 1.59:1 |
| Administration cost per property (real $) | 1,199 | 1,185 | 1,185 |
| FTEs per 1,000 properties managed | 10.8 | 10.8 | 10.8 |
| Credit rating (Standard & Poors') | AAA | AAA | AAA |
The Corporation was forecast to have total assets of $11,819 million at 30 June 2006, funded by debt of $1,962 million and equity of $9,857 million. The ratio of consolidated capital funds to total debt was forecast to be 83:17 at 30 June 2006, and in the following two years.
The equity (assets less liabilities) is the value of the Crown's investment in the Corporation.
| As at 30 June 2007 $000 |
As at 30 June 2008 $000 |
As at 30 June 2009 $000 |
|---|---|---|
| 10,034 | 10,107 | 10,144 |
As a result of the Capital Structure Review in 2003/04, responsible ministers agreed that if the Corporation's ratio of EBIT to net interest falls below 1.3:1, debt will be decreased by $150 million. If it should rise above 1.7:1, debt will be increased by $150 million to maintain an appropriate capital structure. At the same time, ministers agreed that capital appropriations should be drawn down in the ratio of 22:78 of debt to equity.
All current capital appropriations are drawn down in the ratio of 22:78 debt to equity as agreed during the Capital Structure Review. Aside from capital appropriations, the Corporation's capital expenditure programme is funded by cash flows generated from operations and short-term borrowings. The Corporation has been funding the purchase of land at Hobsonville from working capital. In Budget 2005, the Corporation received funding of $54 million to acquire, under the Housing Act 1955, New Zealand Defence Force land at Hobsonville. The land was surplus to defence requirements but suitable for state housing purposes. The Government is considering development options for this land, and the purchase of adjoining New Zealand Defence Force land.
The Housing Corporation Act 1974 section 40(1) requires the Corporation to pay its surplus for each financial year into the Crown's bank account, unless the responsible ministers authorise the Corporation to keep all or any part of it.
Under section 40(2) of the Act, 'surplus' is defined as surplus capital and any operating net surplus after any provision responsible ministers have agreed is necessary for the efficient and effective conduct of the Corporation's operations.
The Corporation will invest only in the shares of another housing services-related business and where shares acquired are considered necessary to achieve our objectives. If we intend to subscribe for, or otherwise acquire, 20 percent or more of the issued capital, we will write to the responsible ministers giving notice of our intention.
The Corporation will get the agreement of responsible ministers before making any material changes to its business.
The Corporation may enter into contractual arrangements with the Crown as required, from time to time. Such arrangements would include agreements in line with section 20B of the Housing Corporation Act 1974. All contractual arrangements will be identified in the Annual Report.
The Corporation and the Crown have agreed, under section 7 of the Housing Restructuring Act 1992, that the Corporation will be compensated for any difference between market rents and income-related rents. This is because the Corporation is required to charge qualifying tenants an income-related rent rather than a market rent.
Information provided to responsible ministers
The Corporation will:
- respond promptly and comply fully with all requests from ministers for information about the Corporation's affairs
- prepare and provide a Statement of Intent to ministers, with the content and process in line with sections 138 to 149 of the Crown Entities Act 2004
- provide quarterly reports to the ministers or their agents to monitor compliance with specific operating procedures and activities that help meet the Crown's social and business objectives
- provide a list of information requested by ministers and report backs identified in the third schedule of the 2006/07 Output Agreement.
Statement of accounting policies
The Corporation maintains its accounting policies in line with legislation and generally accepted accounting standards published by the Institute of Chartered Accountants of New Zealand.
We will apply New Zealand International Financial Reporting Standards (NZIFRS) to financial reporting from 1 July 2007, in line with Crown expectations. The impact of NZIFRS has not been included in any of the forecast financial statements.
The Corporation is a Statutory Corporation (Crown-owned entity) operating under the Housing Corporation Act 1974 (as amended). The core business of Housing New Zealand Corporation (the Corporation) and its subsidiaries is to give effect to the Crown's social objectives by providing housing, and services related to housing, in a business-like manner, and to ensure the Minister of Housing receives appropriate policy advice, other advice, and information on housing and services related to housing.
The Group forecast financial statements are for the Housing New Zealand Corporation Group (the Group), including all its subsidiaries. The forecast financial statements have been prepared and presented in accordance with generally accepted accounting practice in New Zealand, the Financial Reporting Act 1993, the Crown Entities Act 2004 and the Housing Corporation Act 1974 (as amended).
The accounting principles for measuring and reporting financial performance and financial position on an historical-cost basis have been followed, except rental properties and freehold land, which have been revalued under Financial Reporting Standard 3 (FRS 3) Accounting for Property, Plant and Equipment under the modified historical-cost basis.
Specific accounting policies that materially affect the measurement of financial performance and financial position have been consistently applied.
The consolidated financial statements are prepared from the financial statements of the Corporation and its subsidiaries, using the purchase method. All transactions between the Group entities are eliminated on consolidation. Investment in the subsidiaries is stated at cost in the Corporation's financial statements.
Revenue shown in the statement of financial performance comprises the amounts received and receivable by the Group for providing housing and lending services to customers, recognised premium under the Mortgage Insurance Scheme and providing policy advice to the Crown. Parent revenues also include dividends and management fees received and receivable from subsidiaries.
Work undertaken before balance date is recognised as liabilities and expenses, except where the expenditure creates additional service potential. All identifiable obligations relating to building health and safety regulations are recognised as liabilities at balance date.
Depreciation is provided on a straight-line basis on all property, plant and equipment (except for freehold land and capital work in progress) at rates calculated to allocate the cost, or valuation, less estimated residual value of the assets over their estimated useful lives.
Leasehold improvements are depreciated over the shorter of the unexpired period of the lease or the estimated useful life of the improvement.
Depreciation periods of classes of property, plant and equipment are:
| Rental properties | 40 years |
| Leasehold improvements | Period of the lease or estimated useful life |
| Furniture and fittings | 10 years |
| Office equipment | 5 years |
| Computer equipment and software | 4 years |
| Motor vehicles | 5 years |
Operating lease payments, where the lessors effectively keep substantially all the risks and benefits of ownership of the leased items, are included when determining the operating surplus in equal instalments over the lease term.
The income tax expense charged to the statement of financial performance includes the current year's provision and the income tax effects of timing differences calculated using the liability method. Tax effect accounting is applied on a comprehensive basis to all timing differences. A debit balance in the deferred tax account, arising from timing differences or income tax benefits from income tax losses, is only recognised if there is virtual certainty of realisation.
The Group is mainly an exempt supplier in relation to GST. GST on the majority of inputs cannot be reclaimed; therefore it is included in expenditure.
Classes of property, plant and equipment for the Group are:
- Freehold land
- Rental properties
- Capital work in progress
- Leasehold improvements
- Furniture and fittings
- Office equipment
- Computer equipment and software
- Motor vehicles.
All property, plant and equipment is initially recorded at cost. Freehold land and rental properties are revalued to fair value, determined by reference to their highest and best use, on an annual basis under FRS 3 Accounting for Property, Plant and Equipment.
Any surplus arising on the revaluation of freehold land and rental properties is recognised in the asset revaluation reserve. A revaluation deficit greater than the asset revaluation reserve is recognised as an expense in the statement of financial performance in the period it arises. Revaluation surpluses that reverse previous revaluation deficits are recognised as revenue in the statement of financial performance.
Properties intended for sale are recognised at the lower of carrying value or net realisable value.
Mortgage advances are stated at the lower of amounts outstanding net of provisions made on advances considered doubtful of collection, or the recoverable amount.
The mortgage provision reflects an amount considered adequate to provide for probable losses based on the best information available. Where possible, specific provisions are made for loans identified as having particular risk, where security is considered inadequate.
Investments in government securities, short-term and other investments are stated at face value less unamortised discounts and plus unamortised premiums. Discounts and premiums are amortised to income on a yield-to-maturity basis or a straight-line basis over the term of the investment.
Receivables are stated at their estimated realisable value.
Provisions related to insurance provided on mortgages sold have been recorded based upon the present value of an actuarially determined assessment of likely losses.
The premium income realised and the movement in provision for claims during the year are recognised in the statement of financial performance.
The unearned premium reserve consists of the unrealised amount of premium received. This is determined by apportioning premiums received over the relevant periods of risk underwritten, based on actuarially assessed risk factors.
The provision for claims is based on the actuarial assessment of the present value of the estimated cost of future claims, in excess of unrealised amount of premium received.
Financial instruments recognised in the statement of financial position include cash balances, bank overdrafts, receivables, payables, investments, mortgages, and short and long-term borrowings.
The Group uses various financial instruments, some of which have off-balance sheet risk, to reduce its exposure to movement in interest rates and foreign currency exchange rates.
For interest rate swap agreements, the differential to be paid or received is accrued, and is part of the interest expense or income calculated over the life of the agreement.
Premiums paid for interest rate options are expensed in the statement of financial performance. Net settlements on maturity of forward rate agreements and options are amortised over the period of the hedged item. The Group enters into currency and interest rate swaps and foreign currency forward exchange contracts to hedge foreign currency transactions. Any exposure to gains or losses on these forward contracts is generally offset in the statement of financial performance by a related loss or gain on the item being hedged.
Gains and losses on contracts that hedge specific short-term foreign currency denominated transactions are part of the related transaction in the period the transaction occurs.
The Group is not involved in foreign exchange or interest rate speculating. Any financial instruments that do not qualify as hedges are stated at cost, with adjustments for market value in the case of impairment or any other such event.
Transactions in foreign currencies are converted at the New Zealand rate of exchange ruling at the transaction date. Short-term transactions covered by forward exchange contracts are measured and reported at the forward rates specified in those contracts. At balance date, foreign monetary assets and liabilities are translated at the closing rate, and exchange variations arising from these translations are included in the statement of financial performance.
The exchange differences on hedging transactions undertaken to establish the price of particular foreign currency transactions, together with any costs associated with the hedge transactions, are included in the measurement of the foreign currency transactions.
There have been no changes in accounting policies. However, certain items have been re-classified to conform to the current year's presentation of the Corporation's financial statements. These re-classifications do not have a material impact on the substance of the information presented. All accounting policies have been applied on a basis that is consistent with that used in previous years.
The following section describes the Corporation's financial structure, financial performance indicators, financial accounting policies and forecast financial statements.
These statements have been compiled on the basis of government policies at the time they were finalised. The forecast financial statements comply with generally accepted accounting practice and the Crown Entities Act 2004.
In this section, 'Parent' refers to Housing New Zealand Corporation as a discrete entity. 'Group' refers to Housing New Zealand Corporation and its subsidiaries. The principal subsidiary of Housing New Zealand Corporation is Housing New Zealand Limited, which owns and manages the state housing portfolio.
The measurement base applied is modified historical cost and the accrual basis of accounting has been used to prepare these statements. These statements have been prepared on a going-concern basis.
The forecast financial statements do not include the expected impact of future changes in property valuations, which are undertaken annually. The property valuation changes can have a significant impact on the forecast financial statements.
The Corporation's output costs in these statements are derived from the cost allocation system outlined below.
Cost allocation policy
Direct costs are charged directly to key activities. Support and indirect costs are charged to business group activities, based on cost drivers and related activity use.
Criteria for direct, support and indirect costs
Direct costs are those costs directly attributed to a strategic priority. Support costs relate to activities, where a strong link is known. Indirect costs are corporate costs that cannot be linked with a specific strategic priority in an economically-feasible manner.
Direct costs assigned to strategic priorities
Direct costs are charged directly to the strategic priorities' key activities. This includes significant costs, such as interest, property depreciation and rates. Personnel and other operating costs are charged to activities on the basis of pre-determined ratios established through the analysis of business units.
Basis for assigning support and indirect costs
Support costs are assigned to business groups on the basis of the proportion of the services consumed. Indirect (corporate overhead) costs are assigned to the strategic priority key activities on the basis of the full-time staff equivalents that are engaged in these key activities.
The Corporation is required by legislation to operate in a business-like manner when managing Crown resources. Through its financial frameworks, the Corporation aims to provide good financial oversight and stewardship, and efficient and effective management of assets and liabilities. It ensures investment decisions relating to the total portfolio maintain or improve financial performance.
The following table summarises the forecast financial performance of the Group. Full forecast financial statements follow at the end of this section.
| Parent Budget 2006/07 $000 |
Group Budget 2006/07 $000 |
Group Budget 2007/08 $000 |
Group Budget 2008/09 $000 | |
|---|---|---|---|---|
| Total operating revenue | 183,705 | 812,227 | 833,855 | 848,458 |
| Total direct costs | 53,537 | 517,161 | 537,425 | 557,032 |
| Interest costs | 21,603 | 128,685 | 130,399 | 132,091 |
| Other indirect costs | 94,187 | 87,420 | 88,352 | 90,398 |
| Operating surplus before tax | 14,378 | 78,961 | 77,679 | 68,937 |
| Income tax expense/(benefit) | (28,889) | 59,459 | 59,227 | 56,118 |
| Net surplus after tax | 43,267 | 19,502 | 18,452 | 12,819 |
The Corporation will use the following indicators to measure its financial performance.
- Net surplus after tax
This measure indicates how profitable we have been. The net surplus after tax is required to be returned to the Crown as a dividend each year, unless the responsible ministers agree that it is retained in the Corporation.
- Earnings before interest, tax, depreciation, amortisation and leasing (EBITDAL) to income percentage
This measure indicates how efficiently the Corporation manages its costs. It is calculated as total operating revenue less total costs (excluding interest, depreciation, amortisation, leasing and tax), over total operating revenue.
- EBITDAL per property managed (real $)
This is a commercial indicator of financial performance. It is calculated as total operating revenue less total costs (excluding interest, depreciation, amortisation, leasing and tax) divided by equity.
- EBIT/net interest ratio
This measure indicates whether the Corporation's debt to equity ratio will be likely to require adjustment.
- Administration cost per property and the number of full-time staff (FTEs) per 1,000 properties managed (real $)
These ratios are an indication of how efficiently the Corporation's properties are managed.
- Credit rating
This is Standard & Poors' assessment of the Corporation's financial strength - its ability to pay its debts.
| 2006/07 | 2007/08 | 2008/09 | |
|---|---|---|---|
| Net surplus after tax $000 | 19,502 | 18,452 | 12,819 |
| EBITDAL to income % | 53% | 53% | 52% |
| EBITDAL per property managed (real $) | 5,235 | 5,205 | 5,084 |
| EBIT:net interest ratio | 1.68:1 | 1.67:1 | 1.59:1 |
| Administration cost per property (real $) | 1,199 | 1,185 | 1,185 |
| FTEs per 1,000 properties managed | 10.8 | 10.8 | 10.8 |
| Credit rating (Standard & Poors') | AAA | AAA | AAA |
The Corporation was forecast to have total assets of $11,819 million at 30 June 2006, funded by debt of $1,962 million and equity of $9,857 million. The ratio of consolidated capital funds to total debt was forecast to be 83:17 at 30 June 2006, and in the following two years.
The equity (assets less liabilities) is the value of the Crown's investment in the Corporation.
| As at 30 June 2007 $000 |
As at 30 June 2008 $000 |
As at 30 June 2009 $000 |
|---|---|---|
| 10,034 | 10,107 | 10,144 |
As a result of the Capital Structure Review in 2003/04, responsible ministers agreed that if the Corporation's ratio of EBIT to net interest falls below 1.3:1, debt will be decreased by $150 million. If it should rise above 1.7:1, debt will be increased by $150 million to maintain an appropriate capital structure. At the same time, ministers agreed that capital appropriations should be drawn down in the ratio of 22:78 of debt to equity.
All current capital appropriations are drawn down in the ratio of 22:78 debt to equity as agreed during the Capital Structure Review. Aside from capital appropriations, the Corporation's capital expenditure programme is funded by cash flows generated from operations and short-term borrowings. The Corporation has been funding the purchase of land at Hobsonville from working capital. In Budget 2005, the Corporation received funding of $54 million to acquire, under the Housing Act 1955, New Zealand Defence Force land at Hobsonville. The land was surplus to defence requirements but suitable for state housing purposes. The Government is considering development options for this land, and the purchase of adjoining New Zealand Defence Force land.
The Housing Corporation Act 1974 section 40(1) requires the Corporation to pay its surplus for each financial year into the Crown's bank account, unless the responsible ministers authorise the Corporation to keep all or any part of it.
Under section 40(2) of the Act, 'surplus' is defined as surplus capital and any operating net surplus after any provision responsible ministers have agreed is necessary for the efficient and effective conduct of the Corporation's operations.
The Corporation will invest only in the shares of another housing services-related business and where shares acquired are considered necessary to achieve our objectives. If we intend to subscribe for, or otherwise acquire, 20 percent or more of the issued capital, we will write to the responsible ministers giving notice of our intention.
The Corporation will get the agreement of responsible ministers before making any material changes to its business.
The Corporation may enter into contractual arrangements with the Crown as required, from time to time. Such arrangements would include agreements in line with section 20B of the Housing Corporation Act 1974. All contractual arrangements will be identified in the Annual Report.
The Corporation and the Crown have agreed, under section 7 of the Housing Restructuring Act 1992, that the Corporation will be compensated for any difference between market rents and income-related rents. This is because the Corporation is required to charge qualifying tenants an income-related rent rather than a market rent.
Information provided to responsible ministers
The Corporation will:
- respond promptly and comply fully with all requests from ministers for information about the Corporation's affairs
- prepare and provide a Statement of Intent to ministers, with the content and process in line with sections 138 to 149 of the Crown Entities Act 2004
- provide quarterly reports to the ministers or their agents to monitor compliance with specific operating procedures and activities that help meet the Crown's social and business objectives
- provide a list of information requested by ministers and report backs identified in the third schedule of the 2006/07 Output Agreement.
Statement of accounting policies
The Corporation maintains its accounting policies in line with legislation and generally accepted accounting standards published by the Institute of Chartered Accountants of New Zealand.
We will apply New Zealand International Financial Reporting Standards (NZIFRS) to financial reporting from 1 July 2007, in line with Crown expectations. The impact of NZIFRS has not been included in any of the forecast financial statements.
The Corporation is a Statutory Corporation (Crown-owned entity) operating under the Housing Corporation Act 1974 (as amended). The core business of Housing New Zealand Corporation (the Corporation) and its subsidiaries is to give effect to the Crown's social objectives by providing housing, and services related to housing, in a business-like manner, and to ensure the Minister of Housing receives appropriate policy advice, other advice, and information on housing and services related to housing.
The Group forecast financial statements are for the Housing New Zealand Corporation Group (the Group), including all its subsidiaries. The forecast financial statements have been prepared and presented in accordance with generally accepted accounting practice in New Zealand, the Financial Reporting Act 1993, the Crown Entities Act 2004 and the Housing Corporation Act 1974 (as amended).
The accounting principles for measuring and reporting financial performance and financial position on an historical-cost basis have been followed, except rental properties and freehold land, which have been revalued under Financial Reporting Standard 3 (FRS 3) Accounting for Property, Plant and Equipment under the modified historical-cost basis.
Specific accounting policies that materially affect the measurement of financial performance and financial position have been consistently applied.
The consolidated financial statements are prepared from the financial statements of the Corporation and its subsidiaries, using the purchase method. All transactions between the Group entities are eliminated on consolidation. Investment in the subsidiaries is stated at cost in the Corporation's financial statements.
Revenue shown in the statement of financial performance comprises the amounts received and receivable by the Group for providing housing and lending services to customers, recognised premium under the Mortgage Insurance Scheme and providing policy advice to the Crown. Parent revenues also include dividends and management fees received and receivable from subsidiaries.
Work undertaken before balance date is recognised as liabilities and expenses, except where the expenditure creates additional service potential. All identifiable obligations relating to building health and safety regulations are recognised as liabilities at balance date.
Depreciation is provided on a straight-line basis on all property, plant and equipment (except for freehold land and capital work in progress) at rates calculated to allocate the cost, or valuation, less estimated residual value of the assets over their estimated useful lives.
Leasehold improvements are depreciated over the shorter of the unexpired period of the lease or the estimated useful life of the improvement.
Depreciation periods of classes of property, plant and equipment are:
| Rental properties | 40 years |
| Leasehold improvements | Period of the lease or estimated useful life |
| Furniture and fittings | 10 years |
| Office equipment | 5 years |
| Computer equipment and software | 4 years |
| Motor vehicles | 5 years |
Operating lease payments, where the lessors effectively keep substantially all the risks and benefits of ownership of the leased items, are included when determining the operating surplus in equal instalments over the lease term.
The income tax expense charged to the statement of financial performance includes the current year's provision and the income tax effects of timing differences calculated using the liability method. Tax effect accounting is applied on a comprehensive basis to all timing differences. A debit balance in the deferred tax account, arising from timing differences or income tax benefits from income tax losses, is only recognised if there is virtual certainty of realisation.
The Group is mainly an exempt supplier in relation to GST. GST on the majority of inputs cannot be reclaimed; therefore it is included in expenditure.
Classes of property, plant and equipment for the Group are:
- Freehold land
- Rental properties
- Capital work in progress
- Leasehold improvements
- Furniture and fittings
- Office equipment
- Computer equipment and software
- Motor vehicles.
All property, plant and equipment is initially recorded at cost. Freehold land and rental properties are revalued to fair value, determined by reference to their highest and best use, on an annual basis under FRS 3 Accounting for Property, Plant and Equipment.
Any surplus arising on the revaluation of freehold land and rental properties is recognised in the asset revaluation reserve. A revaluation deficit greater than the asset revaluation reserve is recognised as an expense in the statement of financial performance in the period it arises. Revaluation surpluses that reverse previous revaluation deficits are recognised as revenue in the statement of financial performance.
Properties intended for sale are recognised at the lower of carrying value or net realisable value.
Mortgage advances are stated at the lower of amounts outstanding net of provisions made on advances considered doubtful of collection, or the recoverable amount.
The mortgage provision reflects an amount considered adequate to provide for probable losses based on the best information available. Where possible, specific provisions are made for loans identified as having particular risk, where security is considered inadequate.
Investments in government securities, short-term and other investments are stated at face value less unamortised discounts and plus unamortised premiums. Discounts and premiums are amortised to income on a yield-to-maturity basis or a straight-line basis over the term of the investment.
Receivables are stated at their estimated realisable value.
Provisions related to insurance provided on mortgages sold have been recorded based upon the present value of an actuarially determined assessment of likely losses.
The premium income realised and the movement in provision for claims during the year are recognised in the statement of financial performance.
The unearned premium reserve consists of the unrealised amount of premium received. This is determined by apportioning premiums received over the relevant periods of risk underwritten, based on actuarially assessed risk factors.
The provision for claims is based on the actuarial assessment of the present value of the estimated cost of future claims, in excess of unrealised amount of premium received.
Financial instruments recognised in the statement of financial position include cash balances, bank overdrafts, receivables, payables, investments, mortgages, and short and long-term borrowings.
The Group uses various financial instruments, some of which have off-balance sheet risk, to reduce its exposure to movement in interest rates and foreign currency exchange rates.
For interest rate swap agreements, the differential to be paid or received is accrued, and is part of the interest expense or income calculated over the life of the agreement.
Premiums paid for interest rate options are expensed in the statement of financial performance. Net settlements on maturity of forward rate agreements and options are amortised over the period of the hedged item. The Group enters into currency and interest rate swaps and foreign currency forward exchange contracts to hedge foreign currency transactions. Any exposure to gains or losses on these forward contracts is generally offset in the statement of financial performance by a related loss or gain on the item being hedged.
Gains and losses on contracts that hedge specific short-term foreign currency denominated transactions are part of the related transaction in the period the transaction occurs.
The Group is not involved in foreign exchange or interest rate speculating. Any financial instruments that do not qualify as hedges are stated at cost, with adjustments for market value in the case of impairment or any other such event.
Transactions in foreign currencies are converted at the New Zealand rate of exchange ruling at the transaction date. Short-term transactions covered by forward exchange contracts are measured and reported at the forward rates specified in those contracts. At balance date, foreign monetary assets and liabilities are translated at the closing rate, and exchange variations arising from these translations are included in the statement of financial performance.
The exchange differences on hedging transactions undertaken to establish the price of particular foreign currency transactions, together with any costs associated with the hedge transactions, are included in the measurement of the foreign currency transactions.
There have been no changes in accounting policies. However, certain items have been re-classified to conform to the current year's presentation of the Corporation's financial statements. These re-classifications do not have a material impact on the substance of the information presented. All accounting policies have been applied on a basis that is consistent with that used in previous years.
