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• 4.1 Introduction of a Derivation Table
• 4.1.1 Proposed Requirements
• 4.1.2 Rationale for Proposal

4.1 Introduction of a Derivation Table

4.1.1 Proposed Requirements

32. The Ministry has developed a draft table (in Excel format) for derivation of financial performance measures from the financial statements (see Annex 4). The table is based on the derivation table used in the Electricity (Information Disclosure) Regulations 1999. All pipeline owners will be required to complete and disclose the table. The following points about the introduction of the derivation table should be noted:

• It is proposed that the terminology in the financial performance measures (and derivation table) be updated to reflect the terminology used in current financial reporting. This is reflected in Annex 3 and Annex 4. Changes to the financial performance measures consist of:
• return on funds (instead of accounting return on total assets) - defined as earnings before interest and tax (as adjusted) divided by average total funds employed;
• return on equity (instead of accounting return on equity) - defined as net profit after tax (as adjusted) divided by average total equity (as adjusted); and
• return on investment (instead of accounting rate of profit)- the formula is likely to follow the formula in the Electricity (Information Disclosure) Regulations 1999.

Additional changes in terminology include such things as replacing "Earnings before interest and tax" with "Operating surplus before interest and income tax", and replacing "Net profit after tax" with "Net surplus after tax".

• The introduction of ACAM creates a transitional issue, as the opening balances from the (previous year's) Statement of Financial Position are unlikely to have been calculated on a basis consistent with ACAM. It is proposed that this be rectified through the Statement of Movements in Equity, rather than through the Statement of Financial Performance⁴. The opening balances for assets, liabilities and equity used in the calculation of the financial performance measures should, in the first year of disclosure using the prescribed ACAM methodology, be those after any such adjustment in the Statement of Movements in Equity.
• Retrospective ODVs will not be required to be calculated for the beginning of the financial year that ODVs are introduced, for the purpose of calculating financial performance measures. Current system fixed asset valuations will suffice.

4.1.2 Rationale for Proposal

33. The table will assist companies in preparing the performance measure calculations and make the compliance process more consistent and transparent. Experience with the derivation table in the Electricity (Information Disclosure) Regulations is that it has made compliance with the Regulations more straightforward, and has also reduced (basic) errors in the derivation of financial performance measures. It has also made it easier for the Ministry to check on compliance with the Regulations⁵.

⁴There are two reasons for requiring the adjustments to be made through the Statement of Movements in Equity. First, it will make the effect of the change in allocation methodology more transparent. Secondly, it will avoid distorting the Statement of Financial Performance, and the resulting financial performance measures. For example, if (under ACAM) meters have to be allocated to the Other business instead of the Pipeline business, the Statement of Financial Performance would treat the adjustment as a sale, which would impact on the Pipeline business's profits in the year that ACAM is introduced.

⁵The Ministry proposes to place the derivation table on its website for pipeline owners (and others) to download.