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Reporting Entity

The Ministry of Economic Development is a government department as defined by the Public Finance Act 1989.

The financial statements are prepared pursuant to the Public Finance Act 1989, and cover all the activities of the Ministry of Economic Development as set out in the 2006/07 Estimates of Annual Appropriations and Departmental Budgets, including Votes: Economic, Industry and Regional Development; Commerce; Communications; Consumer Affairs; Energy; and Tourism.

In addition, the Ministry has reported the Crown activities and trust monies that it administers.

Measurement Basis

The financial statements have been prepared on an historical basis modified by the revaluation of certain items of property, plant and equipment.

Accounting Policies

The following particular accounting policies that materially affect the measurement of financial results and financial position have been applied.

Budget Figures

The budget figures are those presented in the Budget Estimates (Main Estimates) and those amended by the Supplementary Estimates.

Revenue

The Ministry derives revenue through the provision of outputs to the Crown and for services to third parties. Such revenue is recognised when earned and is reported in the financial period to which it relates.

Realised gains arising from sale of property, plant and equipment are recognised in the Statement of Financial Performance in the period in which the transaction occurs.

Expenditure

Expenses are recognised in the financial period to which they relate. Realised losses arising from sale of property, plant and equipment are recognised in the Statement of Financial Performance in the period in which the transaction occurs.

Unrealised losses arising from changes in the value of property, plant and equipment are recognised in the period in which they occur. Unrealised losses are first applied against the revaluation reserve for that class of asset. The balance, if any, is charged to the Statement of Financial Performance.

Cost Allocation

The Ministry has derived costs shown in these statements using a costing system that directly charged 81.4% of 2006/07 actual costs and indirectly allocated the remaining 18.6% (2005/06, 81.6%, 18.4%).

Direct costs are those attributable to outputs on the basis of resource consumption. Costs that bear no direct relationship to outputs are classified as indirect. These indirect costs are confined to corporate support costs.

The following are the cost drivers employed to assign direct and indirect costs to outputs for the major cost groupings:

Receivables and Advances

Receivables and advances are recorded at estimated realisable value, after providing for doubtful debts.

Inventories

Inventories are stated at the lower of cost (calculated on a "first in, first out" basis) or net realisable value.

Operating Leases

The Ministry leases office premises and office equipment, mainly photocopiers. As all the risks and rewards of ownership are retained by the lessor, these leases are classified as operating leases. Operating lease costs are recognised in a systematic manner over the term of the lease. Leasehold improvements are capitalised, and the cost is amortised over the unexpired period of the lease or the estimated useful life of the improvements, whichever is the shorter. Lease incentives are recognised evenly over the term of the lease as a reduction in rental expense.

Property, Plant and Equipment

Items of property, plant and equipment costing $2,000 (excluding GST) or more are capitalised and are initially recorded at cost. Apart from leasehold improvements, the carrying amounts of property, plant and equipment are reviewed annually to determine if there is any indication of impairment. Where an asset's recoverable amount is less than its carrying amount, it will be reported at its recoverable amount and an impairment loss will be recognised. Losses resulting from impairment are reported in the Statement of Financial Performance, unless the asset is carried at a revalued amount, in which case any impairment loss is first treated as a revaluation decrease.

Leasehold improvements are stated at net current values determined by an independent registered valuer. Leasehold improvements are revalued at least every five years or whenever the carrying amount differs materially from fair value.

Accumulated depreciation at revaluation date may be either restated proportionately or eliminated against the gross carrying amount so that the carrying amount after revaluation equals the revalued amount. The elimination approach is applied unless otherwise indicated.

Realised gains arising from sales of property, plant and equipment are recognised in the Statement of Financial Performance in the period in which the transaction occurs. Unrealised gains arising from changes in the value of property, plant and equipment are recognised at balance date. To the extent gains reverse losses previously charged to the Statement of Financial Performance, the gains are credited to the Statement of Financial Performance. Otherwise, gains are credited to an asset revaluation reserve for that class of assets.

Realised losses arising from sale of property, plant and equipment are recognised in the Statement of Financial Performance in the period in which the transaction occurs.

Unrealised losses arising from changes in the value of property, plant and equipment are recognised in the period in which they occur. Unrealised losses are first applied against the revaluation reserve for that class of asset. The balance, if any, is charged to the Statement of Financial Performance.

Depreciation

Depreciation of property, plant and equipment, other than leasehold improvements and work in progress, is provided on a straight-line basis so as to allocate the depreciable amount of assets over their useful lives. The depreciable amount is the cost or revalued amount (deemed to be cost on transition to NZ IFRS), less the residual value. The estimated useful lives are:

All property, plant and equipment other than motor vehicles ($5,000) are assumed to have no residual value.

The cost (or valuation) of leasehold improvements is capitalised and amortised over the unexpired period of the lease.

Capital work in progress is recognised as costs are incurred. Depreciation is not recorded until the asset is fully operational.

Intangible Assets

Intangible assets are initially recorded at cost. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. The cost of an internally generated intangible asset represents expenditure incurred in the development phase of the asset only. The development phase occurs after the following can be demonstrated: technical feasibility; ability to complete the asset; intention and ability to sell or use; and development expenditure can be reliably measured. Expenditure incurred on research of an internally generated intangible asset is expensed when it is incurred. Where the research phase cannot be distinguished from the development phase, the expenditure is expensed when it is incurred.

Bespoke software (custom-built in-house major registry applications) developed in-house (including work undertaken by IT outsource partners) with a total development cost of under $20,000 (GST exclusive) is expensed. In these cases, any expenditure is to be treated as "software – minor enhancements". Other items of computer software costing $5,000 (excluding GST) or more are capitalised and recorded initially at cost.

Amortisation

Intangible assets with finite lives are subsequently recorded at cost less any amortisation and impairment losses. Amortisation of intangible assets is charged to the Statement of Financial Performance on a straight-line basis so as to allocate the carrying value of the assets over their useful lives. The estimated useful life is:

Intangible assets with finite lives are reviewed at least annually to determine if there is any indication of impairment. Any intangible asset with an indefinite life is also tested for impairment annually. Where an intangible asset's recoverable amount is less than its carrying amount, it will be reported at its recoverable amount and an impairment loss will be recognised. Losses resulting from impairment are reported in the Statement of Financial Performance, unless the asset is carried at a revalued amount, in which case the impairment is treated as a revaluation decrease.

Taxation

The Ministry, as an institution of the Crown, is not required to pay income tax in terms of the Income Tax Act 2004.

Goods and Services Tax (GST)

The Statement of Financial Position is exclusive of GST, except for Payables and Receivables, which are GST inclusive. All other statements are GST exclusive.

The amount of GST owing to or from the Inland Revenue Department at balance date, being the difference between Output GST and Input GST, is included in Creditors and payables, or Receivables and advances (as appropriate).

Provision for Employee Entitlements

Provision is made in respect of the Ministry's liability for annual leave, long service leave and retirement leave. Annual leave is recognised as it accrues to employees at current rates of pay. Long service leave and retirement leave are determined on an actuarial basis based on the present value of expected future entitlements.

Employee entitlements to be settled within 12 months are reported at the amount expected to be paid.

Financial Instruments

Designation of financial assets and liabilities into instrument categories is determined by the business purpose of the financial instruments, policies and practices for their management, their relationship with other instruments, and the reporting costs and benefits associated with each designation. The Ministry is party to financial instruments as part of its normal operations. Apart from foreign currency forward contracts, all financial instruments are recognised in the Statement of Financial Position, and all revenues and expenses in relation to financial instruments are recognised in the Statement of Financial Performance.

Except for those items covered by a separate accounting policy, all financial instruments are shown at their estimated fair value.

Financial Assets

Receivables and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are recognised initially at fair value plus transaction costs. No discounting is applied, as the effect is not material. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired.

Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with a maturity of no more than three months from date of acquisition.

Financial Liabilities

Financial liabilities are recognised initially at fair value less transaction costs and subsequently measured at amortised cost using the effective interest rate method if material. Financial liabilities entered into with a duration of less than 12 months are recognised at their nominal value. Amortisation and, in the case of monetary items, foreign exchange gains and losses are recognised in the Statement of Financial Performance, as is any gain or loss when the liability is derecognised.

Derivatives

Derivative financial instruments are recognised at fair value as either assets or liabilities.

The Ministry enters into foreign currency forward contracts to hedge currency transactions. Any exposure to gains or losses on those contracts is generally offset by a related loss or gain on the monetary asset or liability being hedged.

Statement of Cash Flows

The following are definitions of the terms used in the Statement of Cash Flows:

• cash means coins, notes and current accounts;
• investing activities are those activities relating to the acquisition and disposal of non-current assets;
• financing activities comprise changes in the capital structure; and
• operating activities include all transactions and other events that are not investing or financing activities.

Commitments

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

Contingent Liabilities

Contingent liabilities are disclosed at the point at which the contingency is evident.

Taxpayers' Funds

This is the Crown's net investment in the Ministry.

Changes in Accounting Policies

Accounting policies are changed only if the change is required by a standard or interpretation or otherwise provides more reliable and more relevant information.

No significant changes in accounting policies are expected on transition to NZ IFRS.