Report of the Ministry for the Environment for the year ended 30 June 2007

1 Overview

2 Statement of Service Performance for the Year Ended 30 June 2007

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 $95 million of non-departmental payments, $3 million of non-departmental revenue and receipts, $29 million of assets, and $711 million of liabilities on behalf of the Crown for the year ended 30 June 2007.

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 2006/07.

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.

The accompanying accounting policies and notes form part of these financial statements.

Crown Revenue and Receipts for the Year ended 30 June 2007

View crown revenue and receipts for the year ended 30 June 2007 (large table).

The accompanying accounting policies and notes form part of these financial statements.

Schedule of Expenses for the Year ended 30 June 2007

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 58.

View schedule of expenses for the year ended 30 June 2007 (large table).

The accompanying accounting policies and notes form part of these financial statements.

Schedule of Assets as at 30 June 2007

View schedule of assets as at 30 June 2007 (large table).

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

The accompanying accounting policies and notes form part of these financial statements.

Schedule of Liabilities as at 30 June 2007

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

Actual 30/06/2006 $000		Note	Actual 30/06/2007 $000	Main estimates 30/06/2007 $000	Supplementary estimates 30/06/2007 $000
	Liabilities
8,979	Trade creditors and accruals		7,150	4,200	8,200
655,748	Kyoto Protocol provision	1	704,188	581,995	578,130
664,727	Total non-departmental liabilities		711,338	586,195	586,330

The accompanying accounting policies and notes form part of these financial statements.

Statement of Commitments as at 30 June 2007

At 30 June 2007 there were no operating or capital commitments in relation to the activities undertaken by the Ministry on behalf of the Crown (2006: nil).

The accompanying accounting policies and notes form part of these financial statements.

Statement of Contingencies as at 30 June 2007

At 30 June 2007 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 (2006: 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.

The accompanying accounting policies and notes form part of these financial statements.

Note to the Financial Statements 30 June 2007

1. Provision for New Zealand’s obligation under the Kyoto Protocol

View provision for New Zealand’s obligation under the Kyoto Protocol (large table).

New Zealand ratified the Kyoto Protocol in December 2002. This international agreement commits New Zealand to reducing its average net emissions of greenhouse gases over 2008–2012 (the first commitment period of the Kyoto Protocol or CP1) to 1990 levels or to take responsibility for the difference. New Zealand can meet its commitment through emissions reductions and use of the Kyoto Protocol flexibility mechanisms such as Joint Implementation, the Clean Development Mechanism, and offsetting increased emissions against carbon removed by forests.

The most recent estimate of New Zealand’s net obligation is $NZ704 million (2006: $NZ656 million). This obligation is based on a deficit of 45.5 million emission units and a carbon price of $US11.90 per unit. The carbon price in New Zealand dollars equates to $NZ15.48, using the 30 June 2007 exchange rate of $US0.7689 = $NZ1. (30 June 2006: $US0.6063 = $NZ1, and carbon price $US9.65 per unit).

Provisions by their nature are more uncertain than most other items in the statement of financial position. Fluctuations in the value of the estimate may occur through changes in the assumptions underlying the quantum, movements in the price of carbon and the exchange rate with the United States dollar.

The quantum of the deficit has been compiled from agricultural, forest sink and deforestation projections provided by the Ministry of Agriculture and Forestry, energy (including transport) and industrial processes projections from the Ministry of Economic Development and waste projections from the Ministry for the Environment. The estimate includes the effects of refinements in modelling processes and updated assumptions on variables such as economic growth, population growth and oil prices as at May 2007. The projections use the latest information from the national inventory of greenhouse gas emissions and removals submitted to the United Nations Framework Convention on Climate Change Secretariat on 4 May 2007. Due to improvements in the Greenhouse Gas Inventory, New Zealand’s Assigned Amount Units have increased by 1.9 million. The new assigned amount has now been submitted to the Kyoto Protocol Compliance Committee and is unlikely to change from 309.5 million units.

Net removals via forests are reported after deducting 21 million tonnes for estimated deforestation of pre-1990 forests. This estimate assumes policy interventions to operationalise the Government’s current policy (established in October 2002) to cap its liability for deforestation at this amount. In the absence of policy interventions, and assuming current market conditions prevail, a deforestation intentions survey conducted in 2006 indicated likely deforestation of 41 million tonnes, which would result in a deficit for the Crown of 65.5 million units, and increase the liability to $NZ1.014 billion.

AEA Technology, an independent UK based firm, has assessed the robustness of the assumptions and methodologies underpinning the projections and found them to be sound and reasonable.

The carbon price has been determined by the Treasury. The Allen Consulting Group have reviewed this work and are satisfied that the methodology (and data sources) applied is a robust high level approach, and that $US11.90 is a reasonable carbon price estimate at this time for valuing New Zealand’s possible future liabilities under the Kyoto Protocol.

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.

Subsequent to 30 June 2007, the Government has agreed in principle that as part of its climate change response an Emissions Trading Scheme (ETS) will be implemented. The Government is engaging with stakeholders on the proposed ETS before final decisions are taken. The proposed ETS is a “cap and trade” scheme; that is, the level of emissions is capped with responsibility devolved to emitters to reduce emissions and/or trade emission units to ensure the net position (total emissions less purchased emission units) meet this cap. The impact on the Crown’s net obligation cannot be quantified at this stage as final decisions such as volume and allocation of units have not yet been taken. For further information on the proposed ETS, please refer to http://www.climatechange.govt.nz/

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 2007.

Hugh Logan
Chief Executive
28 September 2007

Countersigned by:

Rochelle Davis
Chief Financial Officer
28 September 2007

Audit Report

To the readers of the Ministry for the Environment’s financial statements and performance information for the year ended 30 June 2007

The Auditor-General is the auditor of 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 on his behalf. The audit covers the financial statements, statement of service performance and schedules of non-Departmental activities included in the annual report of the Ministry for the year ended 30 June 2007.

Unqualified opinion

In our opinion the financial statements of the Ministry comprising the Performance Indicators, Statement of Financial Performance, Statement of Financial Position, Statement of Movements in Taxpayers’ Funds, Statement of Cash Flows, Reconciliation of Net Operating Surplus to Net Cash Flow, 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 16 to the Financial Statements, Statement of Non-Departmental Accounting Policies,  Schedule of Crown Revenue and Receipts, Schedule of Expenses, Schedule of Assets, Schedule of Liabilities, Statement of Commitments, Statement of Contingencies and Note 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 2007; and
  • the results of its operations and cash flows for the year ended on that date.

The statement of service performance of the Ministry:

• comply with generally accepted accounting practice in New Zealand; and
• fairly reflects for each class of outputs:
  • its standards of delivery performance achieved, as compared with the forecast standards outlined in the statement of forecast service performance adopted at the start of the financial year; and
  • its actual revenue earned and output expenses incurred, as compared with the forecast revenues and output expenses outlined in the statement of forecast service performance adopted at the start of the financial year.

The audit was completed on 28 September 2007, 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 and statement of service performance 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 and the statement of service performance. 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 and statement of service performance. 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; and

• determining whether all financial statement and statement of service performance disclosures are adequate.

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

We evaluated the overall adequacy of the presentation of information in the financial statements and statement of service performance. 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 and a statement of service performance in accordance with generally accepted accounting practice in New Zealand. The financial statements must fairly reflect the financial position of the Ministry as at 30 June 2007 and the results of its operations and cash flows for the year ended on that date. The statement of service performance must fairly reflect, for each class of outputs, the Ministry’s standards of delivery performance achieved and revenue earned and expenses incurred, as compared with the forecast standards, revenue and expenses adopted at the start of the financial year. In addition, the schedules of non-Departmental activities 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 2007. The Chief Executive’s responsibilities arise from sections 45A,45B and 45(1)(f) of the Public Finance Act 1989.

We are responsible for expressing an independent opinion on the financial statements and statement of service performance and reporting that opinion to you. This responsibility arises from section 15 of the Public Audit Act 2001 and section 45D(2) of 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.

Other than the audit, we have no relationship with or interests in the Ministry.

 

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

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