Report of the Ministry for the Environment for the year ended 30 June 2005

1 Overview

2 Statement of Service Performance for the Year Ended 30 June 2005

3 Financial Statements for the Ministry for the Environment

4 Non-Departmental Schedules

5 Environmental Report

6 Management of the Ministry

7 Contact Information

4 Non-Departmental Schedules

The following non-departmental statements and schedules record the expenses, revenue and receipts, assets and liabilities that the Ministry manages on behalf of the Crown. The Ministry for the Environment administered approximately $329 million of non-departmental payments, $3 million of non-departmental revenue and receipts, $29 million of assets, and $320 million of liabilities on behalf of the Crown for the year ended 30 June 2005.

These non-departmental balances are consolidated into the Crown Financial Statements and therefore readers of these statements and schedules should also refer to the Crown Financial Statements for 2004/05.

Statement of Accounting Policies

Measurement and recognition rules applied in the preparation of these non-departmental financial statements and schedules are consistent with generally accepted accounting practice and Crown accounting policies.

Land holdings

With the disestablishment of the Ministry of Works and Development in 1988, the Ministry for the Environment inherited a large number of land holdings consisting of:

• reserves that have been taken for flood protection purposes
• soil conservation reserves.

Crown Revenue and Receipts for the year ended 30 June 2005

(GST inclusive where applicable)

Actual 30/06/2004 $000		Actual 30/06/2005 $000	Main estimates 30/06/2005 $000	Supplementary estimates 30/06/2005 $000
	Vote: Environment
	Current revenue
	Non-tax revenue
3	Catchment Works Loans - interest	1	1	1
606	Coastal royalties	877	400	680
18,912	Land recognition	0	0	0
19,521	Total non-tax revenue	878	401	681
	Capital receipts
671	Catchment Works Loans - principal	675	673	673
671	Total capital receipts	675	673	673
20,192	Total Crown revenue and receipts for Vote: Environment	1,553	1,074	1,354
	Vote: Climate Change and Energy Efficiency
	Capital receipts
824	Crown Energy Efficiency Loans	1,088	1,124	1,124
824	Total capital receipts	1,088	1,124	1,124
824	Total Crown revenue and receipts for Vote: Climate Change and Energy Efficiency	1,088	1,124	1,124

Schedule of Expenses for the year ended 30 June 2005

The schedule of expenses summarises non-departmental expenses the Ministry administers on behalf of the Crown. Further details are provided in the Statement of Non-Departmental Expenditure and Appropriations on page 42.

(GST inclusive where applicable)

Actual 30/06/2004 $000		Actual 30/06/2005 $000	Main estimates 30/06/2005 $000	Supplementary estimates 30/06/2005 $000
	Vote: Environment
23,655	Non-departmental output classes	19,009	19,974	19,974
12,099	Loss on sale	0	0	0
3,615	Other expenses to be incurred by the Crown	1,784	1,920	1,958
39,369	Total non-departmental expenses: Vote: Environment	20,793	21,894	21,932
	Vote: Climate Change and Energy Efficiency
12,126	Non-departmental output classes	12,445	12,445	12,445
2,580	Other expenses to be incurred by the Crown	314,206	6,102	6,102
1,652	Capital investment in organisations other than departments	2,000	2,000	2,000
16,358	Total non-departmental expenses: Vote: Climate Change and EnergyEfficiency	328,651	20,547	20,547

Schedule of Assets as at 30 June 2005

The schedule of assets summarises the assets that the Ministry administers on behalf of the Crown.

Actual 30/06/2004 $000		Actual 30/06/2005 $000	Main estimates 30/06/2005 $000	Supplementary estimates 30/06/2005 $000
	Current assets
4,883	Cash	13,731	1,566	2,877
1,503	Accounts receivable	1,839	1,908	1,608
0	Pre-payments	17	0	0
	Non-current assets
6,714	Term receivables and advances	6,615	6,818	6,812
6,813	Crown Land	6,813	6,813	6,813
19,913	Total non-departmental assets	29,015	17,105	18,110

Schedule of Liabilities as at 30 June 2005

The schedule of liabilities summarises the liabilities the Ministry administers on behalf of the Crown.

Actual 30/06/2004 $000		Notes	Actual 30/06/2005 $000	Main estimates 30/06/2005 $000	Supplementary estimates 30/06/2005 $000
	Current liabilities
6,002	Trade creditors and accruals		9,980	4,000	4,000
0	Kyoto Protocol provision	1	309,843	0	0
4	GST		9	0	0
6,006	Total non-departmental liabilities		319,832	4,000	4,000

Statement of Commitments as at 30 June 2005

At 30 June 2005 there were no operating or capital commitments in relation to the activities undertaken by the Ministry on behalf of the Crown (2004: NIL).

Statement of Contingencies as at 30 June 2005

At 30 June 2005 there were no known contingent liabilities or assets. No indemnities or guarantees were given under the Public Finance Act 1989 in relation to the activities undertaken by the Ministry on behalf of the Crown (2004: NIL).

The Ministry for the Environment is owner of a contaminated site at Otaki, Kapiti District. At this stage the liability cannot be valued until further investigation of the site takes place.

Notes to the Financial Statements 30 June 2005

1 Kyoto Protocol Provision

New Zealand's liability under the Kyoto Protocol for the first Commitment Period

New Zealand is a signatory to the Kyoto Protocol, which imposes binding emission reduction targets on New Zealand, over the First Commitment Period (CP1 - 2008-2012). The Protocol entered into force on 16 February 2005, as a result of Russia's decision to ratify.

The position of each country for CP1 is calculated in an agreed manner. Countries may sell any surplus units to countries that need to purchase units to make up a deficit in meeting their Kyoto obligations through domestic action. Alternatively, they can choose to hold on to any surplus emission units to count against emission obligations in future commitment periods.

New Zealand projected net emissions position over the First Commitment Period

The most recent estimate of New Zealand's net position is a net deficit of 36.2 million tonnes of CO₂ equivalent (under a "median" scenario).

Accounting for the estimated liability

In previous forecasts there was insufficient certainty around the robustness of the outcome in terms of some of the variables used. This did not allow the amount of the asset/liability to be reliably measured and, therefore, required disclosure of a contingent liability (as was the case in the 2004 Financial Statements of the Government and the 2005 Budget Economic and Fiscal Update) rather than an actual liability. In addition, at the time previous estimates were published, the determination of a market price was also less reliable.

Over the last year there has been extensive review of the robustness of the assumptions and methodologies underpinning the projections, including improvements to the energy forecasting model and the revision of the forest sink (forest meeting the definition of new forest plantings under the Kyoto Protocol) estimates in light of recent scientific research. This work has significantly reduced the uncertainty around the estimates of the quantum of the liability.

This reduction in uncertainty, combined with t he Protocol's entering into force, means that the value of New Zealand's Kyoto estimated liability can now be measured with sufficient reliability as to require recognition in the Crown financial statements.

In determining the estimated liability, reliance has been placed on information provided by Government Statistics and the agricultural and forestry sector.

There are three key aspects on the liability which are subject to fluctuation through time including:

• assumptions underlying the calculation of the quantum
• price per tonne of carbon
• exchange rate of the United States dollar.

Any changes in the three aspects will impact on the value recognised in these financial statements.

Valuing the estimated liability

The fiscal cost of meeting this liability depends on the quantum of the deficit, the price of Kyoto compliant units and the $US/$NZ exchange rate. Assuming an exchange rate of $US0.701 = $NZ1 (based on 30 June 2005 exchange rate) and a carbon price of $US6 per unit, the current valuation for purchasing 36.2 million units on the international market would be around $310 million. It should be noted that provisions by their nature are more uncertain than most other items in the statement of financial position.

Assurances around the net position estimate

A number of peer reviews have been completed or are to be commissioned in the near future, in order to provide independent analysis of the various components of the net emissions projections:

• a peer review of the 2005 net emissions position calculation has been commissioned by the Ministry for the Environment. This review has been conducted by AEA Technology, who have provided initial verbal verification of the estimate
• Allen Consulting Group has undertaken a review of the Treasury's carbon price assumption
• a review has been completed by Covec of the Ministry of Economic Development's Supply and Demand Energy Model (SADEM) total energy model, and confirmed its appropriateness for the intended purpose with recommended minor improvements to be largely implemented over the coming year. Castalia have completed a review of the electricity component of the 2005 energy greenhouse gas modelling results and recommended some improvements which are expected to have a small effect on emissions
• in determining the estimate of forest sinks, reliance has been placed on information supplied by the forestry sector. This information has not been verified independently, however, where possible it has been reviewed for reasonableness and consistency. For instance, the estimates of new forest plantings have been reviewed by the School of Forestry at the University of Canterbury. Moreover, the various components of New Zealand's Carbon Accounting System will be subject to international expert peer review throughout the system's development and implementation
• the Ministry of Agriculture's livestock numbers projection model was re-developed by the New Zealand Institute of Economic Research (NZIER) in 2003. The greenhouse gas emissions factors that are applied to the projected livestock numbers are based on research by AgResearch and other research institutes. This research programme was independently evaluated in 2005.

Future obligations

No liability or contingent liability for periods beyond 2012 has been recognised, as New Zealand currently has no specific obligations beyond the First Commitment Period. The architecture of any obligations in future periods has yet to be negotiated.

Statement of Responsibility

In terms of the Public Finance Act 1989, I am responsible, as Chief Executive of the Ministry for the Environment, for the preparation of the Ministry's financial statements and the judgements made in the process of producing those statements.

I have the responsibility of establishing and maintaining, and I have established and maintained, a system of internal control procedures that provide reasonable assurance as to the integrity and reliability of financial reporting.

In my opinion, these financial statements fairly reflect the financial position and operations of the Ministry for the year ended 30 June 2005 .

 

Barry Carbon
Chief Executive
30 September 2005

 

Countersigned by:

Paul Bird
Finance Manager
30 September 2005

Audit Report

To the readers of the Ministry for the Environment's financial statements for the year ended 30 June 2005

The Auditor-General is the auditor of the Ministry for the Environment (the Ministry). The Auditor-General has appointed me, Ajay Sharma, using the staff and resources of Audit New Zealand, to carry out the audit of the financial statements of the Ministry, on his behalf, for the year ended 30 June 2005.

Unqualified opinion

In our opinion the financial statements of the Ministry for the Environment comprising the Statement of Objectives and Service Performance, Statement of Financial Performance, Statement of Financial Position, Statement of Movements in Taxpayers' Funds, Statement of Cash Flows, Statement of Commitments, Statement of Contingencies, Statement of Unappropriated Expenditure, Statement of Departmental Expenditure and Appropriations, Statement of Non-Departmental Expenditure and Appropriations, Statement of Accounting Policies, Notes 1 to 15 to the Financial Statements, Statement of Non-Departmental Accounting Policies, Schedule of Non-Departmental Revenue, Schedule of Non-Departmental Expenses, Schedule of Non-Departmental Assets, Schedule of Non-Departmental Liabilities, Schedule of Non-Departmental Commitments, Schedule of Non-Departmental Contingencies and Notes 1 of the Schedules:

• comply with generally accepted accounting practice in New Zealand; and
• fairly reflect:
  • the Ministry's financial position as at 30 June 2005
  • the results of its operations and cash flows for the year ended on that date
  • its service performance achievements measured against the performance targets adopted for the year ended on that date
  • the assets, liabilities, revenues, expenses, contingencies and commitments managed by the Ministry on behalf of the Crown for the year ended 30 June 2005.

The audit was completed on 30 September 2005, and is the date at which our opinion is expressed.

The basis of our opinion is explained below. In addition, we outline the responsibilities of the Chief Executive and the Auditor, and explain our independence.

Basis of opinion

We carried out the audit in accordance with the Auditor-General's Auditing Standards, which incorporate the New Zealand Auditing Standards.

We planned and performed the audit to obtain all the information and explanations we considered necessary in order to obtain reasonable assurance that the financial statements did not have material misstatements, whether caused by fraud or error.

Material misstatements are differences or omissions of amounts and disclosures that would affect a reader's overall understanding of the financial statements. If we had found material misstatements that were not corrected, we would have referred to them in our opinion.

The audit involved performing procedures to test the information presented in the financial statements. We assessed the results of those procedures in forming our opinion.

Audit procedures generally include:

• determining whether significant financial and management controls are working and can be relied on to produce complete and accurate data
• verifying samples of transactions and account balances
• performing analyses to identify anomalies in the reported data
• reviewing significant estimates and judgements made by the Chief Executive
• confirming year-end balances
• determining whether accounting policies are appropriate and consistently applied
• determining whether all financial statement disclosures are adequate.

We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements.

We evaluated the overall adequacy of the presentation of information in the financial statements. We obtained all the information and explanations we required to support our opinion above.

Responsibilities of the Chief Executive and the Auditor

The Chief Executive is responsible for preparing financial statements in accordance with generally accepted accounting practice in New Zealand. Those financial statements must fairly reflect the financial position of the Ministry as at 30 June 2005. They must also fairly reflect the results of its operations and cash flows and service performance achievements for the year ended on that date. In addition, they must fairly reflect the assets, liabilities, revenues, expenses, contingencies and commitments managed by the Ministry on behalf of the Crown for the year ended 30 June 2005. The Chief Executive's responsibilities arise from the Public Finance Act 1989.

We are responsible for expressing an independent opinion on the financial statements and reporting that opinion to you. This responsibility arises from section 15 of the Public Audit Act 2001 and the Public Finance Act 1989.

Independence

When carrying out the audit we followed the independence requirements of the Auditor-General, which incorporate the independence requirements of the Institute of Chartered Accountants of New Zealand.

In addition to the audit, we have provided tax assurance services which are compatible with those independence requirements. Other than the audit and this assignment, we have no relationship with or interests in the Ministry.

 

Ajay Sharma
Audit New Zealand
On behalf of the Auditor-General
Wellington , New Zealand