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• 2009-2010 Statement of Intent
• 2008-2009 Statement of Intent
  • Purpose
  • Foreword: Board Chair
  • Chief Executive's overview
  • Part 1: Operating environment
  • Part 1: Key housing issues in New Zealand
  • Part 1: Role and functions
  • Part 1: The Government's priorities
  • Part 1: The Corporation's strategic direction
  • Part 1: The Corporation's outcomes framework
  • Part 1: Operating intentions
  • Part 1: Financial and information management
  • Part 1: Risk management
  • Part 1: Organisational health and capability
  • Part 1: Consultation and reporting to the Minister of Housing
  • Part 2: Statement of responsibility
  • Part 2: Strategic priority one: Broaden the Corporation's role as a social landlord
  • Part 2: Strategic priority two: Facilitate community development
  • Part 2: Strategic priority three: Strengthen other social housing providers through partnerships
  • Part 2: Strategic priority four: Deliver on Te Au Roa, the Maori Strategic Plan
  • Part 2: Strategic priority five: Contribute to government interventions on housing affordability
  • Part 2: Strategic priority six: Strategic management of assets
  • Part 2: Strategic priority seven: Enhance organisational capability
  • Part 3: Forecast financial highlights for 2008/09
  • part 3: Forecast service performance
  • Part 3: Appropriations
  • Part 3: Statements of underlying assumptions
  • Part 3: Forecast financial statements
• 2007-2008 Statement of Intent

About us

Part 3: Statements of underlying assumptions

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 stock.

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, as it cannot be reasonably supported in complying with Financial Reporting Standard 42 (Forecast Financial Statements). The property valuation changes can have a significant impact on the forecast financial statements.

Increases have been assumed for the Consumer Price Index (CPI ) of 2.5 percent for 2008/09 and 2.3 percent for other years.

The prevailing 30 percent tax rate has been applied to calculate income tax expense.

Rent has been increased on the basis of an average increase of 4.85 percent in the 2008/09 year and CPI increases for the out years.

Interest rates ranges applied in the forecast are:

• the Corporation's borrowing rates range from 8.27 percent to 8.8 percent.
• the Corporation's investment rates range from 8 percent to 8.75 percent.

The projected valuations of financial instruments assume the interest rate remains at the same level as when financial projections were determined.

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 and its subsidiaries are required to adopt New Zealand International Financial Reporting Standards (NZIFRS) to meet the Government's reporting requirements.

Under these standards, the Housing New Zealand Corporation Group is required to recognise deferred tax. Most significantly, this relates to the difference between the historic tax acquisition cost and the generally accepted accounting practice (GAAP) market valuation of properties, and this is captured in the balance sheet as a deferred tax liability.

However, the Group does not expect the deferred tax liability to offset.

Accordingly, the effective tax rate under NZIFRS will be much closer to the statutory rate.

The Corporation is required by legislation to operate in a businesslike 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.

Table 4: Statement of forecast financial performance summary

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 to be returned to the Crown as a dividend each year, unless the responsible ministers agree that it can be retained in the Corporation.
• Earnings before interest, tax, depreciation, amortisation and leasing (EBITDALDALDAL) 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, tax, depreciation, amortisation and leasing), over total operating revenue.
• EBITDALDALDAL per property managed
  This is a commercial indicator of financial performance. It is calculated as total operating revenue less total costs (excluding interest, tax, depreciation, amortisation and leasing) divided by the number of properties managed.
• EBIT/net interest ratio
  This measure indicates whether the Corporation's debt to equity ratio will likely require adjustment.
• Credit rating
  This is Standard & Poors' assessment of the Corporation's financial strength - its ability to pay its debts.

The Corporation is forecast to have total assets of $15.3 billion at 30 June 2009, funded by debt of $3.5 billion and equity of $11.8 billion.

The equity (assets less liabilities) is the value of the Crown's investment in the Corporation.

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, or above 1.7:1, debt will be adjusted 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 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 that responsible ministers have agreed is necessary for the efficient and effective conduct of the Corporation's operations.

The net surplus of the Corporation is paid to the Crown as a dividend each year so, prima facie, net surplus volatility will result in dividend volatility. There is potential for agreements to be made with the Department of Building and Housing, Treasury and joint ministers to the effect that, for the purposes of calculating the dividend, certain accounting transactions are deducted (or added back) from (to) the net surplus. Table 7 highlights the adjusted net surplus after tax to arrive at the potential distribution to the Crown.

Table 7: Adjusted net surplus after tax

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.

The Corporation will:

• respond promptly to 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 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 reports identified in the third schedule of the 2008/09 Output Agreement.

The Corporation maintains its accounting policies in line with legislation and generally accepted accounting standards published by the New Zealand Institute of Chartered Accountants.

We have applied New Zealand International Financial Reporting Standards (NZIFRFRS) to financial reporting from 1 July 2007, in line with Crown expectations.

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 businesslike 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 of 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 for rental properties, freehold land, derivative financial instruments and available-for-sale financial assets that have been measured at fair value with compliance to New Zealand equivalents to International Financial Reporting Standards.

Specific accounting policies that materially affect the measurement of financial performance and financial position since the application of NZIFRS have been consistently applied.

The consolidated financial statements are prepared from the financial statements of the Corporation and its subsidiaries, using the purchase method which measures the purchaser's assets and liabilities at their fair value at acquisition date. All transactions between the Group entities are eliminated on consolidation.

Revenue is shown in the statement of financial performance to the extent that it is probable that the economic benefits will flow to the Group, and the revenue can be reliably measured. Revenue comprises the amounts received and receivable by the Group for providing housing and lending services to customers, recognised premiums 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:

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 movement in the deferred tax liability and asset.

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except in the following instances:

• where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss
• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

The carrying amount of deferred income tax assets is reviewed at balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be used.

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 are 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.

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 whose collection is considered doubtful, 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.

All investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition, investments that are classified as available-for-sale are measured at fair value. Gains or losses on available-for-sale investments are recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in the income statement.

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as loans and receivables, and are measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any discount or premium on acquisition over the period to maturity. For investments carried at amortised cost, gains and losses are recognised in income when the investments are de-recognised or impaired, as well as through the amortisation process.

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 premiums 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 the unrealised amount of premiums 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.

The Group uses derivative financial instruments such as interest rate swaps and foreign currency contracts to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are stated at fair value.

For the purposes of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability, or cash flow hedges where they hedge exposure to variability or a forecasted transaction.

In relation to cash flow hedges, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity; the ineffective portion is recognised in the statement of financial performance. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the statement of financial performance for the year.

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 listed as an expense 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. 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 fair value.

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 except the application of NZIFRS with effect from 1 July 2007. However, certain items have been reclassified to conform to the current year's presentation of the Corporation's financial statements. These reclassifications do not have a material impact on the substance of the information presented.