Section four The finances

Transcription

1 Section four The finances 83

2 Financial statements The financial statements should be read in conjunction with the notes to the financial statements. Statement of compliance The council of Environment Waikato hereby confirms that all statutory requirement in relation to the annual report, as outlined in the Local Government Act 2002, have been complied with. Peter Buckley Chairman Bob Laing Chief Executive 84

3 Statement of comprehensive income For the year ended 30 June 2010 Income Note Page Actual Annual Plan Last year Rates revenue ,509 66,418 62,518 Land transport government grants 9,861 11,180 8,883 Animal Health Board government grants Other government grants Direct charges ,285 8,923 7,884 Other revenue ,226 7,674 10,032 Investment income , ,944 Change in market values of fixed interest investments ,114 2,000 3,055 Transfer of drainage assets from Franklin District Council , Other gains Total income 115,497 96,901 95,805 Expenditure Depreciation ,353 6,139 6,044 Amortisation intangible assets , ,118 Employee benefit expenses ,211 30,312 28,609 Finance costs Other expenditure ,125 58,452 58,695 Change in the market values of equity and alternative investments ,862 Other losses Total operating expenditure 90,816 95, ,328 Share of associate surplus/(deficit) (1,118) - (1,859) Surplus/(deficit) before income tax 23,563 1,268 (6,382) Income tax expense (2) - 9 Net surplus/(deficit) after tax 23,565 1,268 (6,373) Surplus/(deficit) attributable to Environment Waikato 23,565 1,268 (6,373) Other comprehensive income Gain/(loss) on property revaluations (179) Total other comprehensive income - - (179) Total comprehensive income 23,565 1,268 (6,552) Total comprehensive income attributable to Environment Waikato 23,565 1,268 (6,552) Of the net operating surplus: $ million relates to the transfer of drainage assets from Franklin District Council to Environment Waikato. In line with international accounting standards, council is required to classify this transfer as income. $ million has been transferred to reserves, the details of which can be found in note 26. The accompanying notes form part of these financial statements. 85

4 Statement of financial position As at 30 June 2010 Current assets Note Page Actual Annual Plan Cash and cash equivalents , ,858 Debtors and other receivables ,676 12,466 9,752 Prepayments Inventory Work in progress Other financial assets , Total current assets 34,853 13,401 25,386 Non current assets Financial assets ,614 52,500 52,325 Other financial assets ,428 2,180 2,567 Investments in associates ,261 5,238 3,379 Investment properties , Biological assets , ,127 Intangible assets ,333 4,588 2,269 Property, plant and equipment , , ,978 Total non-current assets 466, , ,970 Total assets 501, , ,356 Current liabilities Creditors and other payables ,604 12,128 13,835 Employee entitlements ,427 4,212 3,110 Total current liabilities 18,031 16,340 16,945 Non current liabilities Employee entitlements ,203 2,189 2,093 Total non-current liabilities 2,203 2,189 2,093 Total liabilities 20,234 18,529 19,038 Net assets 480, , ,318 Equity Accumulated funds , , ,262 Other reserves , , ,056 Total equity 480, , ,318 The accompanying notes form part of these financial statements. 86

5 Statement of changes in equity For the year ended 30 June 2010 Note Page Actual Annual plan Last year Balance at 1 July 457, , ,870 Total comprehensive income previously reported ,565 1,268 (6,552) Total comprehensive income as restated 23,565 1,268 (6,552) Balance at 30 June 480, , ,318 Total comprehensive income attributable to Environment Waikato 23,565 1,268 (6,552) Statement of cash flows For the year ended 30 June 2010 Cash flow from operating activities Note Page Actual Annual plan Last year Receipts from customers 85,770 82,073 77,012 Receipts of funding held on behalf of third parties - - 6,022 Grants 11,854 11,180 8,595 Interest income received 1, ,394 Goods and services tax (458) - (3,490) Payments to suppliers and employees (81,924) (86,162) (80,154) Payments of funding held on behalf of third parties (328) - (384) Net cash flow from operating activities ,928 7,797 8,995 Cash flow from investing activities Sale of property, plant and equipment Sale of investments 1,428 2,000 2,838 Receipt of loan repayments Purchase of property, plant and equipment (5,031) (9,916) (7,537) Receipt from sale of investments Acquisition of investments (3,000) (480) Purchase of intangible assets (1,142) - (1,863) Net cash flow from investing activities (7,233) (8,396) (6,192) Cash flow from financing activities Proceeds from borrowings Repayment of borrowings Net cash flow from financing activities Net (decrease)/increase in cash, cash equivalents and bank overdrafts 8,695 (599) 2,803 Cash, cash equivalents and bank overdrafts at the beginning of the year 14, ,055 Cash, cash equivalents and bank overdrafts at the end of the year ,553 (201) 14,858 The GST (net) component of operating activities reflects the net GST paid and received with the Inland Revenue Department. The GST (net) component has been presented on a net basis, as the gross amounts do not provide meaningful information for financial statement purposes. The accompanying notes form part of these financial statements. 87

6 Notes to the financial statements 1 Statement of accounting policies A. Reporting entity Environment Waikato (Waikato Regional Council) is a territorial local authority governed by the Local Government Act 2002, and is domiciled in New Zealand. The primary objective of Environment Waikato is to provide goods or services for the community or social benefit rather than making a financial return. Accordingly, Environment Waikato has designated itself a public benefit entity for the purposes of New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS). The financial statements of Environment Waikato are for the year ended 30 June The financial statements were authorised for issue by council on 30 September B. Basis of preparation Statement of compliance The financial statements of Environment Waikato have been prepared in accordance with the requirements of the Local Government Act 2002, which includes the requirement to comply with New Zealand generally accepted accounting practice ( NZ GAAP ). These financial statements have been prepared in accordance with NZ GAAP. They comply with NZ IFRS, and other applicable Financial Reporting Standards, as appropriate for public benefit entities. Measurement base The financial statements have been prepared on a historical cost basis, modified by the revaluation of land and buildings, certain infrastructural assets, investment property, biological assets and financial instruments (including derivative instruments). Functional and presentation currency The financial statements are presented in New Zealand dollars and all values are rounded to the nearest thousand dollars (). The functional currency of Environment Waikato is New Zealand dollars. Changes in accounting policies There have been no changes in accounting policies during the financial year. The council has adopted the following revisions to accounting standards during the financial year, which have had only a presentational or disclosure effect: NZ IAS 1 Presentation of Financial Statements (Revised 2007) replaces NZ IAS 1 Presentation of Financial Statements (Issued 2004). The revised standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. The statement of comprehensive income will enable readers to analyse changes in equity resulting from non-owner changes separately from transactions with owners. The council has decided to prepare a single statement of comprehensive income for the year ended 30 June 2010 under the revised standard. Financial statement information for the year ended 30 June 2009 has been restated accordingly. Items of other comprehensive income presented in the statement of comprehensive income were previously recognised directly in the statement of changes in equity. Amendments to NZ IFRS 7 Financial Instruments: Disclosures. The amendments introduce a three-level fair value hierarchy that distinguishes fair value measurements by the significance of valuation inputs used. A maturity analysis of financial assets is also required to be prepared if this information is necessary to enable users of the financial statements to evaluate the nature and extent of liquidity risk. The transitional provisions of the amendment do not require disclosure of comparative information in the first year of application. The council has elected to disclose comparative information. NZ IAS 24 Related Party Disclosures (Revised 2009) replaces NZ IAS 24 Related Party Disclosures (Issued 2004). The revised standard simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition. The Council has elected to early adopt the revised standard and its effect has been to disclose additional information about commitments between related parties. 88

7 Standards and interpretation issued and not yet adopted. Standards, amendments and interpretations issued but not yet effective that have not been early adopted, and which are relevant to Environment Waikato include: NZ IFRS 9 Financial Instruments will eventually replace NZ IAS 39 Financial Instruments: Recognition and Measurement. NZ IAS 39 is being replaced through the following three main phases: Phase 1 Classification and Measurement, Phase 2 Impairment Methodology, and Phase 3 Hedge Accounting. Phase 1 on the classification and measurement of financial assets has been completed and has been published in the new financial instrument standard NZ IFRS 9. NZ IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in NZ IAS 39. The approach in NZ IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in NZ IAS 39. The new standard is required to be adopted for the year ended 30 June Environment Waikato has not yet assessed the effect of the new standard and expects it will be adopted early. Significant accounting policies Grant expenditure Non-discretionary grants are those grants that are awarded if the grant application meets the specified criteria and are recognised as expenditure when an application that meets the specified criteria for the grant has been received. Discretionary grants are those grants where Environment Waikato has no obligation to award on receipt of the grant application and are recognised as expenditure when a successful applicant has been notified of Environment Waikato s decision. Income tax Income tax expense is the aggregate of current period movements in relation to both current and deferred tax. Current tax is the amount of income tax payable based on the taxable surplus for the current year, plus any adjustments to income tax payable in respect of prior years. Current tax is calculated using tax rates (and tax laws) that have been enacted or substantively enacted at balance date. Deferred tax is the amount of income tax payable or recoverable in future periods in respect of temporary differences and unused tax losses. Temporary differences are differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable surplus. Deferred tax is measured at the tax rates that are expected to apply when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at balance date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the council expects to recover or settle the carrying amount of its assets and liabilities. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable surpluses will be available against which the deductible temporary differences or tax losses can be utilised. Deferred tax is not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition of an asset and liability in a transaction that is not a business combination, and at the time of the transaction, affects neither accounting surplus nor taxable surplus. Current and deferred tax is recognised against the surplus or deficit for the period, except to the extent that it relates to a business combination, or to transactions recognised in other comprehensive income or directly in equity. Foreign currency transactions Foreign currency transactions (including those for which forward foreign exchange contracts are held) are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the surplus or deficit. C. Property, plant and equipment Property, plant and equipment consists of: operational assets these include land, buildings, plant and equipment, and motor vehicles infrastructure assets infrastructure assets are the flood protection and erosion control assets owned by Environment Waikato. Property, plant and equipment are shown at cost or valuation, less accumulated and impairment losses. 89

8 Additions The cost of an item of property, plant and equipment is recognised as an asset if, and only if, it is probable that future economic benefits or service potential associated with the item will flow to Environment Waikato and the cost of the item can be measured reliably. In most instances, an item of property, plant and equipment is recognised at its cost. Where an asset is acquired at no cost, or for a nominal cost, it is recognised at fair value as at the date of acquisition. Work in progress is recognised at cost less impairment and is not depreciated. Disposals Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of the asset. Gains and losses on disposal are included in the surplus or deficit. When revalued assets are sold, the amounts included in asset revaluation reserves in respect of those assets are transferred to retained earnings. Subsequent costs Costs incurred subsequent to initial recognition are capitalised only when it is probable that future economic benefits or service potential associated with the item will flow to Environment Waikato and the cost of the item can be measured reliably. Depreciation Depreciation is provided on a straight-line basis on all property, plant and equipment other than land and drainage networks, at rates that will write off the cost (or valuation) of the assets to their estimated residual values over their useful lives. The useful lives and rates of the major classes of assets have been estimated as follows. Operational assets Buildings concrete Buildings wooden Motor vehicles Computer equipment Office furniture Plant items Air conditioning Infrastructural assets Ballast 200 Annual rate 1.00 per cent 2.50 per cent per cent per cent per cent per cent 5.00 per cent Bridges Channels Conservation areas fencing and planting Culverts 60 Debris traps 100 Earth detention dams 50 Flood pumps and motors Pipes Power and control equipment Pump stations buildings 60 Retaining structures timber 30 River training works Rock weirs, bank protection and drop structures Screens 20 Stop banks clay foundation 200 Stop banks firm clay foundation 500 Stop banks marine mud 40 Stop banks peat foundation 50 Stop banks sand foundation 125 Structures major 100 Structures minor Telemetry/scada 15 Valves Useful life (years) The residual value and useful life of an asset is reviewed, and adjusted if applicable, at each financial year-end. Revaluation Land and buildings and infrastructural assets are revalued with sufficient regularity to ensure that their carrying amount does not differ materially from fair value and at least every three years. All other asset classes are carried at depreciated historical cost. The carrying values of revalued assets are assessed annually to ensure that they do not differ materially from the assets fair values. If there is a material difference, then the off-cycle asset classes are revalued. 90

9 Revaluations of property, plant and equipment are accounted for on a class-of-asset basis. The net revaluation results are credited or debited to other comprehensive income and are accumulated to an asset revaluation reserve in equity for that class of asset. Where this would result in a debit balance in the asset revaluation reserve, this balance is not recognised in other comprehensive income but is recognised in the surplus or deficit. Any subsequent increase in revaluation that reverses a previous decrease in value recognised in the surplus or deficit will be recognised first in the surplus or deficit up to the amount previously expensed, and then recognised in other comprehensive income. D. Intangible assets Software acquisition and development Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Costs associated with maintaining computer software are recognised as an expense when they are incurred. Costs that are directly associated with the development of software for internal use by Environment Waikato are recognised as an intangible asset. Direct costs include the software development, employee costs and an appropriate portion of relevant overheads. Amortisation The carrying value of an intangible asset with a finite life is amortised on a straight-line basis over its useful life. Amortisation begins when the asset is available for use and ceases at the date that the asset is derecognised. The amortisation charge for each period is recognised in the surplus or deficit. The useful lives or amortisation rates of major classes of intangible assets have been estimated as follows. for internal and external factors which may indicate that the carrying value of its assets exceeds depreciated replacement cost, which could indicate impairment has occurred. If any such indication exists and where the carrying values are found to exceed the estimated recoverable amount, the assets are written down to their recoverable amount or depreciated replacement cost. Impairment losses are recognised in the surplus or deficit in the write downs and disposals line item unless they offset a prior asset revaluation reserve for that asset. E. Investment properties Properties leased to third parties under operating leases are classified as investment property unless the property is held to meet service delivery objectives, rather than to earn rentals or for capital appreciation. Investment property is measured initially at its cost, including transaction costs. After initial recognition, all investment property is measured at fair value as determined annually by an independent valuer. Gains or losses arising from a change in the fair value of investment property are recognised in the surplus or deficit. F. Biological assets Forestry Standing forestry assets are independently revalued annually at fair value less estimated costs to sell for one growth cycle. Fair value is determined based on the present value of expected net cash flows discounted at a current market determined rate. This calculation is based on existing sustainable felling plans and assessments regarding growth, timber prices, felling costs, and silviculture costs and takes into consideration environmental, operational, and market restrictions. Computer software 4 years per cent Impairment of property, plant and equipment and Intangibles The carrying values of operational buildings, plant and equipment and infrastructural assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Environment Waikato s assets do not generate direct cash inflows, and cannot be grouped into cash generating units. Thus council does not group its assets into cash generating units to assess impairment. Council instead annually tests Gains or losses arising on initial recognition of forestry assets at fair value less estimated costs to sell and from a change in fair value less estimated costs to sell are recognised in the surplus or deficit. Forestry maintenance costs are recognised in the surplus or deficit when incurred. G. Accounting for associates Environment Waikato accounts for an investment in an associate in the financial statements using the equity method. The associate is the Lake Taupo Protection Trust. The trust is treated as an associate as council has significant influence 91

10 over it without it being either a subsidiary of any organisation, or an interest in a joint venture. Council has equal significant influence with two other settlors, Taupo District Council and the Crown. As a result council accounts for an equity interest of 33.3 per cent. The carrying amount of council s interest is increased or decreased each year to recognise council s share of the surplus or deficit of the trust in keeping with this 33.3 per cent interest. Council s share of the surplus or deficit of the associate is recognised in the statement of comprehensive income. H. Inventories Inventory held for distribution or consumption in the provision of services that are not supplied on a commercial basis is measured at the lower of cost, adjusted, when applicable, for any loss of service potential. Where inventory is acquired at no cost or for nominal consideration, the cost is the current replacement cost at the date of acquisition. Inventory held for use on the production of goods and services on a commercial basis is valued at the lower of cost and net realisable value. The cost of purchased inventory is determined using the first-in first-out (FIFO) method. The amount of any write-down for the loss of service potential or from cost to net realisable value is recognised in the surplus or deficit in the period of the write-down. I. Debtors and other receivables Debtors and other receivables are initially measured at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. J. Cash and cash equivalents Cash and short term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. K. Provisions The council recognises a provision for future expenditure of uncertain amount or timing when there is a present obligation as a result of a past event, it is probable that expenditures will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are not recognised for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the 92passage of time is recognised as an interest expense. L. Employee entitlements Short term benefits Employee benefits expected to be settled within 12 months of balance date are measured at nominal values based on accrued entitlements at current rates of pay. These include salaries and wages accrued up to balance date, annual leave earned to, but not yet taken at balance date, and sick leave. A liability for sick leave is recognised to the extent that compensated absences in the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated based on the unused sick leave entitlement that can be carried forward at balance date, to the extent it will be used by staff to cover those future absences. A liability and an expense are recognised for bonuses where the council has a contractual obligation or where there is a past practice that has created a constructive obligation. Long term benefits Employee benefits that are due to be settled beyond 12 months after the end of the period in which the employee renders the related service, such as long service leave and retirement gratuities, have been calculated on an actuarial basis. The calculations are based on: likely future entitlements accruing to staff, based on years of service, years to entitlement, the likelihood that staff will reach the point of entitlement, and contractual entitlement information; and the present value of the estimated future cash flows. Expected future payments are discounted using market yields on government bonds at balance date with terms to maturity that match, as closely as possible, the estimated future cash outflows for entitlements. The inflation factor is based on the expected long-term increase in remuneration for employees. Presentation of employee entitlements Sick leave, annual leave, vested long service leave, and nonvested long service leave and retirement gratuities expected to be settled within 12 months of balance date are classified as a current liability. All other employee entitlements are classified as a non-current liability. M. Creditors and other payables Creditors and other payables are initially measured at fair value and subsequently measured at amortised cost using the effective interest method.

11 N. Leases Finance leases A finance lease is a lease that transfers to the lessee substantially all the risks and rewards incidental to ownership of an asset, whether or not title is eventually transferred. At the commencement of the lease term, finance leases are recognised as assets and liabilities in the statement of financial position at the lower of the fair value of the leased item or the present value of the minimum lease payments. The finance charge is charged to the surplus or deficit over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. The amount recognised as an asset is depreciated over its useful life. If there is no certainty as to whether the council will obtain ownership at the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life. Operating leases An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term. O. Revenue Revenue is measured at the fair value of consideration received or receivable. Rates revenue Rates are set annually by a resolution from council and relate to a financial year. All ratepayers are invoiced within the financial year to which the rates have been set. Rates revenue is recognised when payable. Government grants Government grants are recognised as revenue upon entitlement, as conditions pertaining to the eligible expenditure have been fulfilled. Fees and charges Fees and charges are recognised as revenue when the obligation to pay arises or, in the case of annual charges, when invoiced. Expenditure is recognised when the service has been provided or the goods received. Interest and dividends Interest income is recognised using the effective interest method. Dividends are recognised when the right to receive payment has been established. P. Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: where the GST incurred on a purchase of goods and services is not recoverable from the Inland Revenue Department (IRD), in which case the GST is recognised as part of the cost of acquisition of the assets or as part of the expense item as applicable; and receivables and payables (excluding accruals) are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the IRD is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the IRD are classified as operating cash flows. Commitments and contingencies are disclosed exclusive of GST. Q. Equity Equity is the community s interest in council and is measured as the difference between total assets and total liabilities. Public equity is disaggregated and classed into a number of reserves to enable clearer identification of the specified uses of its accumulated surpluses. The components of equity are: retained earnings restricted reserves council-created reserves asset revaluation reserves. Reserves Reserves are a component of equity generally representing a particular use to which various parts of equity have been assigned. Reserves may be legally restricted or created by council. Restricted reserves are those reserves subject to specific conditions accepted as binding by the council and which may not be revised by the council without reference to the Courts or third party. Transfers from these reserves may be made only for certain specified purposes or when certain conditions are met. Council created reserves are reserves established by council decision. The council may alter them without reference to any 93

12 third party or the Courts. Transfers to and from these reserves are at the discretion of the council. Asset revaluation reserves represent unrealised gains on assets owned by Environment Waikato. The gains are held in the reserve until such time as the gain is realised and a transfer can be made to accumulated funds. R. Cost allocation Environment Waikato has derived the net cost of services for each significant activity of the council using the cost allocation system outlined below. Cost allocation policy Direct costs are charged directly to significant activities. Indirect costs are charged to significant activities based on a model that allocates cost, by a predetermined level of activity usage. S. Financial assets The council classifies its financial assets into the following four categories: financial assets at fair value through the surplus or deficit held-to-maturity assets loans and receivables financial assets at fair value through comprehensive income. The council uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The four categories of financial assets are as follows. Financial assets at fair value through surplus/deficit This category has two sub-categories: financial assets held for trading those designated at fair value through surplus/deficit at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or if so designated by management. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. After initial recognition they are measured at their fair values. Gains or losses on remeasurement are recognised in the surplus or deficit. 94 The classification depends on the purpose for which the investments are acquired. Management determines the classification of its investments at initial recognition and reevaluates this designation at every reporting date. Financial assets and liabilities are initially measured at fair value plus transaction costs unless they are carried at fair value through surplus/deficit, in which case the transaction costs are recognised in the surplus or deficit. Purchases and sales of investments are recognised on tradedate, the date on which the council commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the council has transferred substantially all the risks and rewards of ownership. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price is the current bid price. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. Financial assets in this category include council funds under management. The underlying assets of the investment fund may be actively traded by the fund managers, and sold at any point in time to provide operating cash flow in line with council s investment policy. Loans and receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition they are measured at amortised cost using the effective interest method. Gains and losses when the asset is impaired or derecognised are recognised in the surplus or deficit. Loans and receivables are classified as debtors and other receivables in the statement of financial position. Held to maturity investments Held to maturity investments are assets with fixed or determinable payments and fixed maturities that the council has a positive intention and ability to hold to maturity. After initial recognition they are measured at amortised cost using the effective interest method. Gains and losses when the asset is impaired or derecognised are recognised in the surplus or deficit.

13 Financial assets at fair value through comprehensive income Financial assets at fair value through comprehensive income are those that are designated as fair value through equity or are not classified in any of the other categories above. This category encompasses investments that the council intends to hold long term but which may be realised before maturity. After initial recognition these investments are measured at their fair value, gains and losses are recognised directly in comprehensive income except for impairment losses, which are recognised in the surplus or deficit. In the event of impairment, any cumulative losses previously recognised in equity will be removed from comprehensive income and recognised in the surplus or deficit even though the asset has not been derecognised. On derecognition the cumulative gain or loss previously recognised in comprehensive income is recognised in the surplus or deficit. T. Impairment of financial assets Financial assets are assessed for objective evidence of impairment at each balance date. Impairment losses are recognised in the surplus or deficit. Loans and other receivables Impairment is established when there is objective evidence that the council will not be able to collect amounts due according to the original terms of the debt. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, and default in payments are considered indicators that the asset is impaired. The amount of the impairment is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted using the original effective interest rate. For debtors and other receivables, the carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the surplus or deficit. When the receivable is uncollectible, it is written off against the allowance account. Overdue receivables that have been renegotiated are reclassified as current (that is, not past due). Impairment in term deposits, local authority stock, government stock and community loans are recognised directly against the instrument s carrying amount. Financial assets at fair value through other comprehensive income For equity investments, a significant or prolonged decline in the fair value of the investment below its cost is considered objective evidence of impairment. For debt investments, significant financial difficulties of the debtor, probability that the debtor will enter into bankruptcy, and default in payments are considered objective indicators that the asset is impaired. If impairment evidence exists for investments at fair value through other comprehensive income, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less and impairment loss on that financial asset previously recognised in the surplus or deficit) recognised in other comprehensive income is reclassified from equity to the surplus or deficit. Equity instrument impairment losses recognised in the surplus or deficit are not reversed through the surplus or deficit. If in a subsequent period the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed in the surplus or deficit. U. Budget figures The budget figures are those approved by the council at the beginning of the year in the Long Term Plan. The budget figures have been prepared in accordance with NZ GAAP, using accounting policies consistent with those adopted by Environment Waikato for the preparation of the financial statements. V. Critical accounting estimates and assumptions In preparing these financial statements Environment Waikato has made estimates and assumptions concerning the future. These estimates and assumptions may differ from the subsequent actual results. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations or future events that are believed to be reasonable under the circumstances. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Infrastructural assets Note 24 provides information about the estimates and assumptions applied in determining the fair value of infrastructural assets. W. Critical judgments in applying Environment Waikato s accounting policies Management has not exercised any critical judgments in applying Environment Waikato s accounting policies for the period ended 30 June

14 2 Summary of cost of services For the year ended 30 June 2010 Revenue Actual Annual Plan Community Partnerships 9,051 9,234 10,102 Environmental Management 27,303 26,454 29,379 Regional Development 28,475 29,107 27,257 Safe and Resilient Communities 26,612 26,416 25,677 Council controlled organisations 5,057 4,844 3,501 Corporate and self funding 7, (111) Transfer of drainage assets from Franklin District Council 11, ,497 96,901 95,805 Expenditure Community Partnerships 7,737 9,158 9,701 Environmental Management 25,696 26,454 29,343 Regional Development 29,056 29,976 27,854 Safe and Resilient Communities 23,260 25,005 23,991 Council controlled organisations 3,053 4,574 3,681 Corporate and self funding 2, ,758 Net (deficit)/surplus before share of associate and reserve transfers 90,814 95, ,328 24,683 1,268 (4,523) 3 Rates revenue Rates revenue Targeted rates attributable to activities General rates 32,848 29,635 Biodiversity 927 1,665 Biosecurity 6,152 5,862 Permitted activity monitoring River and catchment systems 16,361 15,786 Transport 6,920 6,237 Protecting Lake Taupo 2,749 2,724 Total targeted rates 34,050 33,204 Rates revenue 66,898 62,839 Less rates remissions (316) (321) Less valuation objections settled prior year rates (73) - Total rates revenue 66,509 62,518 96

15 Rates remissions Rates revenue is shown net of rates remissions. Environment Waikato s rates remission policies allow for the remission of the following rates: land protected for conservation purposes Lake Taupo lakebed Maori freehold land urban land in areas classified as rural, commercial or industrial biosecurity works and services rate on fenced indigenous bush and wetland areas rating units with a capital value of $1,000 or less sporting and recreational organisations community organisations undeveloped land, native bush or swamp areas charged the Waihou/Piako catchment rate. Non-rateable land Under the Local Government (Rating) Act 2002 certain properties cannot be rated for general rate. These properties include schools, places of religious worship, public gardens and reserves. These non-rateable properties may be subject to targeted rates. Non-rateable land does not constitute a remission under Environment Waikato s rates remission policy. 4 Direct charge revenue Direct charges Compliance monitoring direct charges 1,429 1,410 Consent application fees 2,154 2,446 Consent holder charges 1,754 1,705 Other direct charges 1,948 2,323 Total direct charges 7,285 7,884 5 Other revenue Other revenue Rental income Bus fare revenue 4,726 4,178 Other income 4,438 4,889 Royalties Total other revenue 10,226 10,032 97

16 6 Investment revenue Finance income Interest income - term deposits and call accounts 1,226 1,309 - related party loans community loans statutory land charges Dividends Total finance income 1,318 2,239 Finance costs Investment management fees (304) (295) Total finance costs (304) (295) 7 Change in market value of investments Investment held at balance date Assets at fair value through income statement Net finance income 1,014 1,944 Fixed interest 24 3,055 Alternatives (ASF II fund) (54) (270) Equities (World Equity Strategies Fund) 2,148 (5,592) Change in the market values of equity investments 2,094 (5,862) Unrealised gain/(loss) on assets at fair value through income statement 2,118 (2,807) Investments realised during the year Assets at fair value through income statement Fixed interest (World Bond Fund) 5,996 - Equities (World Equity Strategies Fund) - - Realised gain/(loss) on assets at fair value through income statement 5,996 - Total change in market value of investments 8,114 (2,807) Financial Risk Management Strategies Environment Waikato is exposed to financial risks associated with changes in value of the financial instruments that comprise its investment fund. Environment Waikato is a long term investor, and accepts that returns in any given year may vary from its long term target return. Risk is managed through the use of a diversified portfolio of financial assets. Council also undertakes a regular review of the risk profile associated with the investment fund, and adjusts its asset allocation policy accordingly. Following a review of the investment fund s Strategic Asset Allocation and fund managers, council made a decision to transfer the Russell World Bond Fund investment ($ million) to a Global Fixed Interest portfolio through Tower ($22.0 million) and a New Zealand cash holding with AMP Capital ($ million). The remaining $2.7 million, being working capital funds held by fund managers, was transferred to call accounts and term deposits administered by council staff. This transfer was affected in June 2010 and resulted in the return from the World Bond Fund for the year being realised. Refer to note 31 for further information regarding council s financial instrument risks. 98

17 8 Other gains/(losses) Gains/losses 9 Employee benefit expenses Employee benefit expenses Gain/(loss) on changes in fair value of biological assetss (49) 281 Gain on changes in fair value of investment property - 5 Gain on changes in fair value of properties available for sale - - Total gains/(losses) (49) 286 Salaries and wages 28,298 27,847 Increase/(decrease) in employee benefit liabilities (87) 762 Total employee benefit expenses 28,211 28,609 The impact of the actuarial valuation of long service leave and retirement gratuity liability has been to increase the employee benefit expense by $85,000 (2009: $446,000) as a result of using a lower range of discount factors from 3.67% to 6.00% (2009: 3.77% to 6.47%). 10 Other expenses Expenditure Insurance premiums Subscriptions and levies Debts written off Impairment of receivables Impairment of property, Plant and equipment Impairment of financial investments Fees paid to auditors: Audit of Annual Report Fees paid to auditors: Audit of LTCCP - 87 Fees paid to auditors: Audit of amendment to LTCCP 18 - Fees paid to auditors: Additional fee for prior year audit Other assurance services 33 4 Donations 7 4 Minimum lease payments under operating leases Direct expenses from investment property generating income 10 4 Direct expenses from investment property not generating income - - Other operating expenses 51,740 55,915 Inventory consumption Councillors remuneration Meeting attendance and salary Expenses Total other expenses 55,125 58,695 The increase in insurance premiums is due to RiskPool calls on councils for leaky building claims. In the previous year, this was shown as a contingent liability. 99

18 11 Income tax Generally local authorities are exempt from income tax, except for any income derived from any council controlled organisation or port activity as per Section CW39 of the Income Tax Act Council has received interest income on a loan to a council controlled organisation on which tax is payable. Taxation Current tax expense - 2 Adjustment to current tax in prior years (2) (11) Deferred tax liability - - Tax expense (2) (9) Net surplus/(deficit) before tax 23,563 (6,382) Tax at 30% (33% in 2008) 7,069 (1,915) Plus (less) tax effect of: Non-deductible expenditure - - Non-taxable income (7,069) 1,915 Add: Income taxable to council Less: Expenses deductible to council (11) (26) Less: Tax expense over/understated prior period (2) (11) Less: Payments reclassified to other expenditure - - Tax loss not recognised Tax expense (2) (9) A deferred tax asset of $1,476 has not been recognised in relation to tax losses. Tax receivable (payable) Opening balance (2) 11 Prior Period adjustment 2 - Subvention payment - - Current tax liability - (2) Tax paid - (11) Other adjustments - - Tax receivable - (2) 12 Explanation of major variances against budget Explanations for major variations from Environment Waikato s estimated figures in the 2009/10 Annual Plan are as follows. Statement of comprehensive income Rates revenue is $164,000 (2009: $410,000) higher than budgeted as a result of the increase in both property numbers and values subsequent to the rates being calculated and struck. Offsetting this additional revenue is the settlement of forestry valuation objections, which have seen council reduce rates charged to large forestry blocks in the central North Island in prior years by $73,000. Provision of $30,000 has been made for further rates credits in relation to rates charged to those properties for the 2005/06 and 2006/07 years. 100

19 Government grant revenue received in relation to passenger transport reflects the cap on funding introduced by New Zealand Transport Agency. This funding cap has resulted in some planned services not being introduced in 2009/10. Other income, including direct charges, of $17.7 million exceeded budget by $1.103 million. This reflects unbudgeted revenue ($810,000) received for projects that council administers on behalf of project partners. This revenue is offset by unbudgeted expenditure of the same amount. Investment income of $2.032 million (2009: $1.944 million) was $1.326 million higher than budget. Cash invested in call accounts and term deposits returned $1.202 million (2009: $1.288 million) for the year. The investment fund, overall, reflected a net gain of $8.114 million (2009: $2.807 million unrealised loss), against a budgeted return of $2.0 million. Due to the economic conditions at the time of preparing the budget, council had only budgeted for a return from the fixed interest portion of the fund. These assets increased in value by $5.846 million (2009: $3.055 million). Equity investments increase in value by $2.023 million (2009: $5.862 million decrease in value). The excess return over budget has been transferred to reserves. Overall and amortisation expense of $7.431 million (2009: $7.16 million) was $562,000 higher than budgeted, primarily in relation to infrastructural assets. The budgeted in some zones had not been adjusted to reflect the level of charges resulting from the last asset revaluation. Additional operational fixed asset of $154,000 has been funded from a withdrawal from the reserve. Employee benefit expenses were favourable against budget by $2.101 million. This reflects delays in recruiting staff to both existing and new positions. The share of associate s deficit relates to Environment Waikato s share in the operations of the Lake Taupo Protection Trust. Council is a funder of the Trust, along with Taupo District Council and the Crown. The objective of the Trust is to protect Lake Taupo s water quality by reducing nitrogen leaching into the lake. Environment Waikato has completed the transfer of drainage assets valued at $ million previously owned by Franklin District Council. These assets are now managed by Environment Waikato under a service level agreement with Franklin District Council. Asset values were transferred based on depreciated replacement cost. Balance sheet Cash and cash equivalents are higher than budgeted by $ million (2009: $ million). This position reflects a number of factors, including: reduced capital expenditure programme in relation to both operational and infrastructural capital expenditure - $3.522 million funds held by council on behalf of third parties $4.448 million (2009: $6.4 million) opening balance of cash held being higher than budget expenditure on river and catchment services and biosecurity being less than budget by $4.25 million. Financial assets, being council s investment fund, is higher than budgeted, reflecting the performance of the fund over the year. The total return from the fund was $7.816 million, against a budget of $2.0 million. Surplus returns have been transferred to the investment equalisation reserve. At 30th June 2010 the reserve had a deficit balance of $1.678 million (2009: $7.199 million). Investment in associates relates to Environment Waikato s interest in the Lake Taupo Protection Trust. Investment properties are $3.883 million lower than budget. The purchase of property in Hamilton East, adjacent to council s current offices, was treated in the budget as an investment property, but has been recognised in the financial statements as property, plant and equipment. 101