Archived publication

This publication is no longer current or has been superseded.

3. Financial Statements for the Ministry for the Environment

Notes to the Non-Departmental Financial Statements

1. Statement of accounting policies for the year ended 30 June 2008

Reporting entity

These non-departmental schedules and statements present financial information on public funds managed by the Ministry on behalf of the Crown.

These non-departmental balances are consolidated into the Financial Statements of the Government. For a full understanding of the Crown’s financial position, results of the operation and cash flows for the year, reference should also be made to the Financial Statements of the Government.

Accounting policies

These non-departmental schedules and statements have been prepared in accordance with the Government’s accounting policies as set out in the Financial Statements of the Government, and in accordance with relevant Treasury instructions and Treasury circulars.

Measurements and recognition rules applied in the preparation of these non-departmental schedules and statements are consistent with New Zealand generally accepted accounting practice as appropriate for public benefit entities.

This is the first set of financial statements prepared using NZ IFRS. The comparatives for the year ended 30 June 2007 have been restated to NZ IFRS accordingly. Reconciliations of income and expenses and assets and liabilities for the year ended 30 June 2007 under NZ IFRS to the balances reported in the 30 June 2007 financial statements are detailed in note 6.

The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in preparing an opening NZ IFRS statement of financial position as at 1 July 2006 for the purposes of the transition to NZ IFRS.

The following particular accounting policies have been applied:

Foreign exchange

Foreign currency transactions are translated into New Zealand dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of the monetary assets and liabilities denominated in foreign currencies are recognised in the schedule of non-departmental income or expenses.

Goods and services tax

All items in the financial statements, including appropriation statements, are stated exclusive of GST, except for receivables and payables, which are stated on a GST inclusive basis. In accordance with the Treasury instructions, GST is returned on revenue received on the behalf of the Crown, where applicable. However, an input tax deduction is not claimed on non-departmental expenditure. Instead, the amount of GST applicable to non-departmental expenditure is recognised as a separate expense and eliminated against GST revenue on consolidation of the government financial statements.

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.

Land is recorded at fair value less impairment losses. Valuations undertaken in accordance with standards issued by the New Zealand Property Institute are used where available. Otherwise, valuations conducted in accordance with the Rating Valuation Act 1998, which have been confirmed as appropriate by an independent valuer, have been used.

Land is revalued every 5 years in line with Crown accounting policies. The last valuation was in the 2003/04 financial year.

Debtors and other receivables

Debtors and other receivables are initially measured at fair value and subsequently measured at amortised cost using the effective interest rate, less any provision for impairment.

Loans at nil, or below-market interest rates are initially recognised at the present value of their expected future cash flows, discounted using a rate for loans of a similar term and credit risk. They are subsequently measured at amortised cost using the effective interest method. The difference between the face value and present value of expected future cash flows of the loan is recognised in the statement of financial performance.

Commitments

Future expenses and liabilities to be incurred on non-cancellable contracts that have been entered into at balance date are disclosed as commitments to the extent that there are equally unperformed obligations.

Cancellable commitments that have penalty or exit costs explicit in the agreement on exercising that option to cancel are included in the Statement of Commitments at the value of that penalty or exit cost.

Budget figures

The budget figures are the latest set of Supplementary Forecasts and those presented in the Ministry’s Statement of Intent 2008 (Main estimates).

2. Debtors and other receivables

  Actual
30/06/2008
$000		 Actual
30/06/2007
$000
Loans receivable 3,899 4,742
Other receivables 0 164
Total debtors and other receivables 3,899 4,906
Represented by:    
Current 1,392 2,172
Non-current 2,507 2,734

Loans receivables represent loans given to third parties on behalf of the Energy Efficiency and Conservation Authority (EECA).

The carrying value of the loans approximates their fair value. The fair value of the loans is $3,899,706 (2007: $4,174,027). The fair values are based on cash flows discounted using a rate based on weighted market rates for loans of similar terms and credit risk of 7.49% (2007: 7.49%).

The face value of these loans outstanding is $4,722,677 (2007: $4,742,307).

The Crown holds no collateral over these loans, including those loans that are overdue or impaired.

There were no overdue or impaired loans outstanding as at 30 June 2008 (2007: nil).

As at 30 June 2008 and 2007, all loans have been assessed for impairment and appropriate provision applied, as detailed below:

  Gross 2008 Impairment Net Gross 2007 Impairment Net
Not past due 3,899 0 3,899 4,906 0 4,906
Past due 1 – 90 days 0 0 0 0 0 0
Past due 90 – 180 days 0 0 0 0 0 0
Past due 180 – 360 days 0 0 0 0 0 0
Past due > 360 days 0 0 0 0 0 0

Total

3,899

0

3,899

4,906

0

4,906

No provisions made for doubtful debts as all debtors are current. There were no indications at balance date these debtors are impaired.

3. Creditors and other payables

  Actual
30/06/2008
$000		 Actual
30/06/2007
$000

Creditors

11,252

7,150
Total creditors and other payables 11,252 7,150

Creditors and other payables are non-interest bearing and are normally settled within 30 days, therefore the carrying value of creditors and other payables approximates their fair value.

4. Provision for New Zealand’s Obligation under the Kyoto Protocol

Analysis of provision for Kyoto Protocol obligation Actual
30/06/2008
$ million		 Actual
30/06/2007
$ million
Opening provision 704 656

Change in the price of carbon

226

(20)

Change in net projected emission units

(368)

68
Closing provision 562 704
     
  Emission units15 Emission units

Kyoto Target (Assigned Amount Units)

309.6

309.5

Less AAUs allocated to emission reducing projects

7.0

7.5
Total commitment target 302.6 302.0
     
Projected emission units    

Agriculture

198.5

203.1

Energy (including transport) and industrial processes

185.6

195.1

Waste

7.2

7.0

Solvent and other product use

0.2

0.3
Total projected emission units 391.5 405.5

Removals via forests

84.1

79.0

Deforestation emissions

(16.9)

(21.0)
Net removals via forests 67.2 58.0
Net projected emission units 324.3 347.5
     
Deficit in units 21.7 45.5
     
  $ million $ million
Deficit in $ millions 562 704

New Zealand has committed under the Kyoto Protocol 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. This obligation will crystallise when the first Kyoto commitment period is settled up post-2012.

New Zealand’s net obligation as at 30 June 2008 of $NZ562 million (2007: $NZ704 million) is based on a deficit of 21.7 million Kyoto Protocol emission units and a carbon price of € EURO 12.50 per unit. The carbon price in New Zealand dollars equates to $NZ25.89, using the 30 June 2008 exchange rate of € EURO 0.48285 = $NZ1 (30 June 2007: € EURO 0.57260 = $NZ1, and a carbon price € EURO 8.86 per unit).

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 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 14 April 2008.

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 movement in the projected balance of Kyoto Protocol units is set out in the Net Position Report 2008: Projected balance of Kyoto Protocol units during the first commitment period which is published by the Ministry for the Environment. The movement in the projected emission units’ deficit is primarily related to the following key factors:

  • transport sector emissions are projected to be lower than in 2007 due to actual fuel use data in 2007 being lower than projected and fuel prices being higher

  • agriculture emissions are projected to be lower due to the effects of drought early in 2008 and a continuing decline in sheep numbers; based on an intentions survey, emissions from deforestation are projected to be lower than in 2007 mainly due to the implementation of an Emissions Trading Scheme

  • there is an increase in the estimate of removals due to the implementation of recommendations made by AEA Technology.

A full copy of this report can be found on the Ministry’s website: www.mfe.govt.nz

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 € Euro 12.50 is a reasonable carbon price estimate at this time for valuing New Zealand Government’s possible future liabilities under the Kyoto Protocol.

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 European currency unit, and government policy changes.

The Climate Change (Emissions Trading and Renewable Preference) Bill had its third and final reading on 10 September 2008. This Bill establishes an Emissions Trading Scheme (ETS) in New Zealand. The Net Position Report 2008 has been prepared on the basis of the government decision to introduce an ETS in New Zealand.

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.

5. Events after the balance sheet date

Subsequent to the balance sheet date, the Ministry on behalf of the Crown has entered into a deed of funding for the amount owed to the Crown in relation to the Mapua contaminated site clean up project.

6. Explanations of major variances against budget

Explanations for the major variances from the Ministry’s non-departmental estimated figures in the Main Estimates are as follows:

Schedule of income and expenses

(i) Statement of income

 

Actual
30/06/2008
$000

Main estimates
30/06/2008
$000

Variance
$000

Revision in carbon units

368,103

0

368,103

 

Income was higher than anticipated due to the revision in carbon units in the financial year ended 30 June 2008.

There were no other significant variances to budget.

(ii) Statement of assets
  Actual
30/06/2008
$000		 Main estimates
30/06/2008
$000		 Variance
$000

Cash and cash equivalents

20,572

14,093

6,479
(iii) Statement of liabilities
  Actual
30/06/2008
$000		 Main estimates
30/06/2008
$000		 Variance
$000

Creditors and other payables

11,252

8,200

3,052

Kyoto Protocol provision

562,173

578,130

(15,957)

The Ministry extended its year-end accounts payable cut-off to enable invoices from the service providers to be included in the 2007/08 accounts. This resulted in higher than budget Cash and cash equivalents and Creditors and other payables balances at year-end. Cash disbursement from Crown was also drawn down in line with the supplementary estimates which contributed to the higher cash balance.

Kyoto Protocol provision is less than estimated due to the revision in carbon units and fluctuations in foreign exchange rates. It was difficult to predict the impact on year-end as the price per emission unit and the exchange rate prevailing at year-end were all unknown quantums.

7. Explanations of transition to NZ IFRS

Reconciliation of assets and liabilities

There has been some adjustments to non-departmental recognised assets and liabilities on transition to NZ IFRS, these were not material, however are as outlined below.

Debtors and other receivables

Under previous NZ GAAP loans receivable had been valued at the original loan principal amount, less any loan repayments made. Loans are granted on interest free terms. NZ IAS 39 requires receivables to be initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate. In accordance with NZ IAS 39 loans have been valued at initial recognition at the net present value of expected future repayments, using market interest rates for the instruments with a similar credit rating as the discount factor. The effect of this has been a reduction in the debtor carrying value of $584,000 on the transition to NZ IFRS at 1 July 2006 and increase of $14,000 at 30 June 2007.

Investment in Crown entities

Under previous NZ GAAP, investments in Crown entities were treated as investments and were disclosed in the Schedule of Non-Departmental Assets. However, on the transition to NZ IFRS these investments are no longer required to be disclosed in the Schedule of Non-Departmental Assets.

Reconciliation of income and expenses

There has been one adjustment to non-departmental income and expenses on transition to NZ IFRS, as outlined below.

Gains/(Losses)

Under NZ IFRS loans receivable are subsequently measured at amortised cost using the effective interest method. The effective interest method allocates gains or losses over the life of the loan to the statement of financial performance. No gain/(loss) were recognised on loans at nil interest rate under previous NZ GAAP. The gain for the year ended 30 June 2007 was $14,000.

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 statement of service performance, and for the judgements made in them.

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

In my opinion, these financial statements and statement of service performance fairly reflect the financial position and operations of the Ministry for the year ended 30 June 2008.

 

Paul Reynolds
Chief Executive
30 September 2008

Countersigned by:

Rochelle Davis
Chief Financial Officer
30 September 2008

15 One emission unit is equivalent to one tonne of greenhouse gas emissions converted to carbon dioxide equivalents by the global warming potential.

[ |