Final Report of the. Public Trust Office. For the period 1 July 2001 to 28 February 2002

Transcription

1 Final Report of the Public Trust Office For the period 1 July 2001 to 28 February 2002

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3 Contents Chairman s Report... 4 Chief Executive Officer s Report... 5 Statement of Responsibility... 7 Financial Statements... 8 Statement of Accounting Policies Notes to the Financial Statements Report of the Auditor-General Financial Trends

4 Chairman s Report The enactment of the Public Trust Act 2001 established the Public Trust as a body corporate and a Crown Entity for the purposes of the Public Finance Act A new Board was appointed to govern Public Trust from 1 March At the same time, the Act disestablished the Public Trust Office. Section 172 of Part 10, the transitional provisions of the Public Trust Act 2001, requires the Board to prepare a balance sheet, profit and loss account, and profit and loss appropriation account relating to the operations of the Public Trust Office for the period 1 July 2001 to 28 February Accordingly, the Board presents this last report of the Public Trust Office whilst noting that operational control of the Public Trust Office for this period was the responsibility of the Public Trustee. The Board has exercised a great deal of diligence in determining the appropriate basis for the establishment of the financial position of the new Public Trust. As a result, there have been a number of changes in accounting policy particularly relating to accounting for liabilities and property, plant and equipment. The Board also gave consideration to the presentation of the financial report, and has adopted the presentation format prevailing in the finance industry. In the Board s opinion, this presentation better reflects the nature and risks of the business. Peter J M Taylor CHAIR 4

5 Chief Executive Officer s Report The 28 February 2002 represents a watershed date in the long history of the institution, the Public Trust Office. On this day, the Public Trust Act 2001 disestablished the Public Trust Office and established a body corporate, Public Trust, effective 1 March At this time of transition, it is important to reflect on and reaffirm Public Trust s values of integrity, care and excellence, and recognise the need to build on these. Public Trust must also continue to improve its business and administrative systems consistent with best practice as it moves into the future. The deficit of $7 million for the last eight months of the Public Trust Office is not pleasing to report. However, the result must be considered in the context of the events of this period and in particular, that the Public Trust Office was required to meet its public service obligations from the proceeds of its commercial activities. The reported deficit also includes a number of exceptional costs related to the implementation of modernisation and other changes relating to the new Act. In addition there are a number of significant expenses which arise from the considerable attention given to and the actions that were necessary to satisfy both the preparation of the final Statement of Financial position of the Public Trust Office, and the requirement to determine the opening Statement of Financial Position of the new Public Trust. The significant costs were: $m Cost related to development of e-commerce capability and other systems initiatives 1.00 Additional charge due to change in actuarial assumption in regard to long term employee benefits 1.00 Additional provisions for the cost of remedial work and litigation 0.70 Costs of modernisation 0.60 Effect of discounting long term receivables 0.40 Reversal of fees to implement a new fee charging regime with effect from 1 January The Public Trust Act 2001 established a foundation that will enable a process of business practice modernisation that will take a number of years. Public Trust will be building on its strengths and its established customer base in order to position itself to operate successfully in the commercial environment while continuing to fulfil its social responsibility obligations. It is recognised that the task ahead is challenging. The Business Plan for 2002/03 forecasts a deficit for the four months to 30 June 2002 and a marginally better than breakeven position for the 2002/03 fiscal year. The low profit budgeted is not a soft target. For the four years to June 2001, the Public Trust Office recorded an average operating surplus before tax and abnormal items of $0.4 million p.a. However, once tax and the abnormal items are costed back into these results, the result is very much worse. For the four year and eight month period to 28 February 2002, the average loss after tax and abnormal items is $4 million p.a., and despite increasing productivity, the underlying trend has been one of increasing losses

6 The first reason for this has been a reduction in quantity and quality (measured in terms of fee revenue generated) in deceased estates from the Public Trust wills bank. The second reason has been a steady decline in Public Trust s most successful investment product, Safecare. In 1996, Safecare investments were $360 million and today they are $150 million. Unfortunately, these changes are permanent and in the short term irreversible. Looking forward, Public Trust, unlike the Public Trust Office, receives an appropriation from the Crown for its public service obligations. For the 2002/03 year, this is expected to be $4.3 million. Partially offsetting this will be a decline in investment income from Public Trust s reserves. On 30 June 1999, the reserves held by the Public Trust Office were $86.3 million, but as of today, the reserves held by Public Trust are of the order of $40 million, the Public Trust Office in this time having paid back $25 million to the Crown and accumulated losses of just over $21 million. Public Trust s fees for managing deceased estates are lower than those used by the Public Trust Office. Fees were reduced to improve retention of existing wills clients and to increase the number of deceased estates being managed by Public Trust where Public Trust did not hold the final will. While deceased estate numbers are being built up by Public Trust to compensate for this price reduction, there is a significant income gap that will hit hardest in the 2002/03 year. The future of a New Zealand wide, accessible Public Trust depends on revenue growth. Meeting the 2002/03 plan s first objective, to reverse the trend of recent years by making a profit for the year to 30 June 2003, will be a very important step to returning Public Trust to the profitable position that is expected of it. Tim Sole CHIEF EXECUTIVE 6

7 Statement of Responsibility The Public Trust Office operated under the Public Trust Office Act 1957 until that Act was repealed by the Public Trust Act The Public Trustee was a corporation sole, which had the status of a legal entity separate and distinct from the Crown. The then Public Trustee was Chief Executive under the State Sector Act and was responsible and accountable to the Minister in Charge of the Public Trust Office for the financial, human resource and general management of the Office. The Board of the Public Trust, which came into formal existence after the disestablishment of the Public Trust Office on 28 February 2002, is charged by the Public Trust Act 2001 with the responsibility for preparing the Financial Statements that appear on pages 8 to 31. The judgments which have been made in the preparation of those Statements are detailed in the Statement of Accounting Policies appearing on pages 12 to 14. In our opinion the Statement of Financial Position fairly reflects the financial position of the Public Trust Office as at 28 February Peter J M Taylor CHAIR Tim Sole CHIEF EXECUTIVE 7

8 Statement of Financial Position as at 28 February 2002 Group Parent Feb June Feb June notes $000 $000 $000 $000 ASSETS Cash and bank 2,001 3,994 1,995 3,989 Money market deposits at call 15,785 18,170 15,785 18,170 Interest bearing securities 1 134, , , ,480 Advances to clients 3,315 5,994 3,315 5,994 Accrued income 1,430 2,368 1,430 2,368 Trade debtors 2,072 2,258 1,799 1,942 Sundry debtors 2 1, , Investments in managed funds 145, , , ,331 Advances secured by mortgage 3 163,745 94, ,745 94,701 Total financial assets 470, , , ,812 Prepayments Inventory Property, plant & equipment 4 8,277 10,615 8,277 10,615 Intangibles 5 5,398 5,843 Sums due from subsidiary 317 Investment in subsidiary 6 7,134 7, , , , ,025 LIABILITIES Liability to clients 324, , , ,590 Liability to clients term deposits 108,379 84, ,379 84,428 Accrued interest 1,573 1,526 1,573 1,526 Total liabilities to clients 434, , , ,544 Trade creditors 2,932 2,740 2,916 2,672 Other creditors Provisions for employee entitlements 8 4,690 4,201 4,690 4,201 Other provisions 9 1,927 1,660 1,927 1,660 Loans from subsidiary 1, Total liabilities 444, , , ,962 Equity 40,174 72,230 40,174 73,063 Total liabilities plus equity 484, , , ,025 Peter J M Taylor CHAIR Liz Coutts DIRECTOR 28 July July 2002 The Statement of Accounting Policies and Notes to the Financial Statements form part of this financial statement. 8

9 Statement of Movements in Equity for the period 1 July 2001 to 28 February 2002 Group Parent Feb June Feb June $000 $000 $000 $000 Equity at the beginning of the period 72,230 77,821 73,063 77,987 Net surplus (deficit) after tax (7,056) (5,591) (7,889) (4,924) Total recognised revenues & expenses for the period (7,056) (5,591) (7,889) (4,924) Distributions to owner during the period (25,000) (25,000) Equity at the end of the period 40,174 72,230 40,174 73,063 The Statement of Accounting Policies and Notes to the Financial Statements form part of this financial statement. 9

10 Statement of Financial Performance for the period 1 June 2001 to 28 February 2002 Group Parent Feb June Feb June notes $000 $000 $000 $000 INCOME FROM FINANCIAL INSTRUMENTS Interest from interest bearing securities 7,755 9,347 7,753 9,347 Interest from advances secured by mortgage 5,044 7,431 5,044 7,431 Distributions from managed funds 5,463 15,161 5,463 15,161 18,262 31,939 18,260 31,939 Interest expense 11,194 18,462 11,194 18,462 7,068 13,477 7,066 13,477 OTHER OPERATING REVENUE Rent from properties Fees from managed funds 4,368 7,443 4,367 7,443 Fees and commissions from clients 17,889 26,973 16,978 26,881 Miscellaneous income , ,157 35,619 22,541 35,517 Income before operating expenses 30,225 49,096 29,607 48,994 EXPENSE Operating costs 31,551 41,376 31,515 41,274 Operating lease costs 3,192 4,833 3,192 4,833 Depreciation 2,221 4,024 2,221 4,024 Net losses on disposals of property, plant & equipment Impairment losses Amortisation of goodwill ,278 37,898 51,127 38,695 50,358 Net gains (losses) on investments 617 (3,560) 617 (3,560) Equity accounted earnings 582 Net surplus (deficit) for the period 13, 14 (7,056) (5,591) (7,889) (4,924) The Statement of Accounting Policies and Notes to the Financial Statements form part of this financial statement. 10

11 Statement of Cash Flows for the period 1 July 2001 to 28 February 2002 Group Parent Feb June Feb June notes $000 $000 $000 $000 CASH FLOWS FROM OPERATING ACTIVITIES Cash was provided from: Fees and other income 23,931 35,073 23,262 34,975 Dividends 5,843 14,890 5,842 14,816 Interest 13,146 16,481 13,144 16,481 42,920 66,444 42,248 66,272 Cash was applied to: Operating expenses 33,478 47,038 33,396 46,401 Interest 10,886 17,281 10,887 17,281 Taxation 141 GST ,599 64,322 44,376 63,707 Net cash flows from operating activities 15 (1,679) 2,122 (2,128) 2,565 CASH FLOWS FROM INVESTING ACTIVITIES Cash was provided from: Sale of property, plant & equipment Net proceeds from sale and maturity of investments 20,479 20,479 20, , Cash was applied to: Purchase of property, plant & equipment 488 2, ,500 Net purchase of investments 6,577 6, , ,348 Net cash flows from investing activities 20,097 (8,886) 20,097 (9,317) CASH FLOWS FROM FINANCING ACTIVITIES Cash was provided from: Net receipts from clients 4,589 5,779 5,037 5,779 Cash was applied to: Distributions to owner 25,000 25,000 Net cash flows from financing activities (20,411) 5,779 (19,963) 5,779 Net (decrease) increase in cash (1,993) (985) (1,994) (973) Cash at beginning of period 3,994 4,979 3,989 4,962 Cash at end of period 2,001 3,994 1,995 3,989 The Statement of Accounting Policies and Notes to the Financial Statements form part of this financial statement. 11

12 Statement of Accounting Policies for the period 1 July 2001 to 28 February 2002 REPORTING ENTITY AND STATUTORY BASIS FOR REPORTING... These are the final financial statements of Public Trust Office (the Office), an entity established by the Public Trust Office Act With effect from 1 March 2002 the Public Trust Act 2001 repealed the Public Trust Office Act 1957 thereby disestablishing the Office and establishing Public Trust in its place. The Public Trust Act 2001 requires Public Trust to prepare a financial report covering the period from 1 July 2001 to 28 February 2002 as if the Office was reporting under the Public Trust Office Act Because the Office is an issuer, the Office is also subject to the Financial Reporting Act The Office is therefore required to comply with generally accepted accounting practice. The Office comprises the legal entity as defined by the Public Trust Office Act 1957 and its significant subsidiary and includes those liabilities defined as the Common Fund by section 48 of the Public Trust Act The activities and assets of the Group Investment Funds and Public Trust Investment Funds managed by the Office are not included except to the extent that the Office has invested in those funds on its own account. Similarly, the assets managed for individual trusts, except for cash held in the Common Fund, are not included. MEASUREMENT BASIS... Historic cost and fair value accounting measurement bases have been applied in the preparation of this financial report. REPORTING PERIOD... The reporting period is for the 8 months from 1 July 2001 to 28 February The comparative period is for the 12 months from 1 July 2000 to 30 June ACCOUNTING POLICIES... Basis of consolidation The consolidated financial statements include the Office and its significant subsidiary, New Zealand Permanent Trustees, accounted for using the purchase method. This entails a lineby-line aggregation of the financial statements and the elimination of intragroup transactions and balances. Goodwill arising on consolidation Goodwill is amortised in equal annual instalments over the period expected to benefit, which is 10 years. The resultant carrying value is subject to an impairment review to ensure that the carrying value does not exceed the recoverable amount. Investment in subsidiary The parent s investment in its significant subsidiary is accounted for using the equity method of accounting. This entails recognising the parent s share of increases in post acquisition equity and amortising goodwill arising on acquisition over a 10 year period. ASSETS... Investments Investments in fixed interest securities and managed funds are carried at fair value. Advances secured by mortgages and other advances to clients Advances secured by mortgage and other advances originated by the entity are carried at the face value of principal outstanding plus interest added to principal less general and specific provision. Interest arising not yet added to principal, excluding that related to delinquent loans, is accrued as at balance date. A general provision is made to estimate declines in recoverable amounts incurred not yet known. Acquired advances secured by mortgage are accounted for by discounting anticipated cash flows at the investment yield established at the inception of the acquisition so as to deliver a constant rate of return on monies invested across the assumed life of the mortgage portfolio. Accrued income Short term accruals are interest or distributions from managed funds arising not yet received or added to principal. 12

13 Statement of Accounting Policies for the period 1 July 2001 to 28 February 2002 continued Inventory Inventory is measured at the lower of cost, determined on a first in first out basis, and net realisable value. Trade and other debtors Trade debtors, in the main, represent certain claims for estate administration services where payment is not due until an uncertain point in the future. The timing of the future cash flows have been estimated and discounted accordingly. Other trade debtors represent short term fees invoiced or about to be invoiced but not yet settled and are carried at cash settlement value. Property plant & equipment Property, plant & equipment is recorded initially at the cost necessary to bring each item into working condition. Until property plant and equipment is brought into a workable condition costs are accumulated as capital work in progress. At the point the asset is operational the cost, less estimated residual value, is depreciated in equal annual instalments across the asset s useful life. Property, plant & equipment are treated as funded from equity, accordingly no interest cost from financial liabilities is attributed to the relevant cost. In the case of fixtures and fittings installed in leasehold properties useful lives are considered to correspond to the contractual term of the relevant lease. No account is taken of rights of renewal. Useful lives are assessed annually to ensure they remain appropriate and are adjusted as is necessary. In addition major items of property plant & equipment are subject to impairment review where warranted. Depending upon whether an asset is considered to be directly related to cash flows or not, impairment considerations apply. In the event the asset is not considered directly related to cash flows, it is written down to an estimate of depreciated replacement cost. In the event that the asset is considered to embody cash flows, an impairment trigger mechanism is applied and, if the impairment criteria are met, it is written down to recoverable amount if less than carrying amount. Useful economic lives are as follows: Plant, vehicles, furniture and fittings 3 10 years EDP equipment and software 3 5 years LIABILITIES... General Other than as specified, liabilities are recognised when the goods and services to which they relate are received or as statutory obligations arise. Such liabilities are carried at the amount of cash required to settle those liabilities. Commitments, where the value of the goods or services yet to be received is approximately equal to the consideration to be paid, are not recognised. Liabilities to clients These represent the Office s liabilities for estate funds invested in the Common Fund and are carried at the amount of cash required to settle those obligations. Provisions for employee entitlements Provision is made for annual leave in accordance with the accumulated entitlement at the balance date. This is carried at the cash amount necessary to settle the obligation. No allowance is made for non-vesting obligations such as sick leave. Provision is made for long service leave and retirement benefits on an actuarial basis. Projected cash flows are estimated in accordance with both national and entity experience. Resultant projected cash flows are discounted in accordance with the risk free interest rate as they align with the term structure of interest rates. Other provisions The vacant space provision represents gross rentals payable on premises leases, less rentals receivable from sub-leases, discounted for the time value of money. All other provisions, are recognised when the Office becomes obligated, at the amount of cash estimated as necessary to settle the obligation or defend legal action. 13

14 Statement of Accounting Policies for the period 1 July 2001 to 28 February 2002 continued Derivatives Interest rate swaps and forward rate agreements are specifically entered into to modify the interest rate character of designated interest bearing assets so as to align the interest rate character with that corresponding to the interest bearing liabilities. These contracts are therefore accounted for on the same basis as the asset to which they relate. As these assets are accounted for at fair value, then so too are the related derivatives. Leases Leases where title does not transfer and the major portion of the asset is not consumed by the Office or where the present value of the lease payments does not exceed 90% of the fair value of the asset the subject of the lease, then such an asset is accounted for as an operating lease. Subject to the vacant space provision such leases are recognised as costs when payments are made. Revenue recognition Commission and fee revenue from clients is recognised as service delivery takes place, as funds are available, or assets are realised. CHANGES IN ACCOUNTING POLICY... The accounting policy in respect to long-term trade debtors has been changed so as to discount for the time value of money. Previously, these debtors were carried at the cash settlement value of the debt due. The vacant space provision policy has changed so as to discount for the time value of money. The parent s investment in its significant subsidiary has been changed from a cost to an equity accounted basis. Certain expenditure on computer and information technology was previously capitalised as property, plant and equipment. Where such expenditure is exploratory in nature, the benefits arising uncertain, or direct cash flows are difficult to distinguish, the expenditure is now written off as incurred. The effect of these changes is given in note 13. With the exception of the above changes there have been no material changes in accounting policy during the period. Tax Future income tax benefits relating to accumulated losses are not recognised as assets on the basis that tax losses are forfeit on the establishment of Public Trust. CHANGE IN PRESENTATION... A review of the financial reporting presentation of the Office, and therefore of its successor the Public Trust, has been undertaken. This Statement of Financial Position has been presented in broad order of liquidity, which better presents the nature of the Office s operation. This presentation resulted in substantial change in format, which are summarised in note

15 Notes to the Financial Statements for the period 1 July 2001 to 28 February INTEREST BEARING SECURITIES Group Parent notes $000 $000 $000 $000 Local authorities 3,834 6,874 3,834 6,874 Banks 63,249 37,947 63,249 37,947 State owned enterprises 22,172 19,850 22,172 19,850 Mortgage backed securities 11,343 11,996 11,343 11,996 Corporate bonds 34,606 37,831 34,606 37,831 Derivatives (net) (333) (18) (333) (18) 2 SUNDRY DEBTORS 134, , , ,480 GST Other taxes due Other ADVANCES SECURED BY MORTGAGE 1, , Gross value 164,133 94, ,133 94,953 General provision (388) (252) (388) (252) 163,745 94, ,745 94,701 General provision Opening balance Charge for year Closing balance

16 Notes to the Financial Statements for the period 1 July 2001 to 28 February PROPERTY, PLANT AND EQUIPMENT Group Parent notes $000 $000 $000 $000 Plant, vehicles, furniture & fittings Cost 13,844 14,527 13,844 14,527 Accumulated depreciation (8,444) (8,409) (8,444) (8,409) 5,400 6,118 5,400 6,118 EDP equipment & software Cost 11,765 12,177 11,765 12,177 Accumulated depreciation (9,747) (9,080) (9,747) (9,080) 2,018 3,097 2,018 3,097 7,418 9,215 7,418 9,215 Capital work in progress Opening balance 1,400 1,400 Transfers to EDP equipment & software (108) (108) Additions during year 1,400 1,400 Impairment write downs (433) (433) 859 1, ,400 Total property plant & equipment 8,277 10,615 8,277 10,615 5 INTANGIBLES Goodwill arising on acquisition 6,676 6,676 Opening Accumulated amortisation (833) (166) Charge for period (445) (667) Closing Accumulated amortisation (1,278) (833) 5,398 5,843 16

17 Notes to the Financial Statements for the period 1 July 2001 to 28 February INVESTMENT IN SUBSIDIARY Percent held New Zealand Permanent Trustees Limited 100% 100% New Zealand Permanent Trustees Limited provides trustee and supervisory services. New Zealand Permanent Trustees Limited s balance date is 30 June A special financial report has been prepared for the purposes of group reporting as at 28 February 2002 and the results audited as part of the group. Group Parent notes $000 $000 $000 $000 Analysis of investment Original investment 7,831 Less: equity at date of acquisition (1,155) Goodwill 6,676 Less: amortised to date 5 (1,278) 5,398 Add: net assets at 28 February 2002 Net assets at 1 July ,154 Earnings arising in the period 582 1,736 Carrying value at 28 February ,134 7,831 7 OTHER CREDITORS Withholding taxes payable Fee reversals PROVISIONS FOR EMPLOYEE ENTITLEMENTS Annual leave 1,381 1,502 1,381 1,502 Long service leave 2,989 2,299 2,989 2,299 At risk salaries ,690 4,201 4,690 4,201 The substantial increase in the long service leave provision is the result of a miscalculation by the Office s advisers in their actuarial valuation at 30 June

18 Notes to the Financial Statements for the period 1 July 2001 to 28 February OTHER PROVISIONS Group Parent notes $000 $000 $000 $000 RESTRUCTURING Opening balance Additions during the period Amount used during the period (cash paid) (238) (238) Reversal of provision not used (65) (65) Closing balance REMEDIAL WORK & LITIGATION Opening balance Gross up for debit balance Restated Additions during the period Amount used during the period (cash paid) (64) (64) Reversal of provision not used (92) (92) Closing balance VACANT SPACE Opening balance Amount used during the period (cash paid) (124) (124) Reversal of provision not used (64) (64) Discount (144) (144) Closing balance ,927 1,540 1,927 1,540 Change in comparative Total provisions 1,927 1,660 1,927 1,660 The restructuring provision relates primarily to the termination of employment. It is expected that the sums provided will be paid within one year. The remedial work and litigation provision relates to a number of matters where fault or alleged fault has been found with the Office s service delivery. Given the nature of the legal process final resolution may take a number of years. The vacant space provision recognises the cost of leases of surplus premises through to the conclusion of the leases. The final lease expires in

19 Notes to the Financial Statements for the period 1 July 2001 to 28 February RE-PRICING MATURITY AND INTEREST RATE MANAGEMENT GROUP 2002 Effective Total 6 months 6 to 12 1 to 2 2 to 5 Over 5 interest rate or less months years years years $000 $000 $000 $000 $000 $000 ASSETS Cash and bank 4.80% 2,001 2,001 Money market deposits at call 4.80% 15,785 15,785 Interest bearing securities 5.45% 134, ,500 18,362 5,009 Advances to clients 6.11% 3,315 3,315 Investments in managed funds 5.62% 145, ,878 Advances secured by mortgage 6.92% 163, ,840 16,982 7,370 8,553 Other financial assets (inc. tax) n/a 4,643 4, , ,962 35,344 7,370 13,562 LIABILITIES Liability to clients 3.03% 324, ,273 6,955 Liability to clients term deposits 4.79% 108,379 91,798 16,581 Accrued interest n/a 1,573 1, , ,071 23,536 1,573 DERIVATIVES Interest rate swaps & FRAs 13,629 5,132 (6,960) (11,801) Re-pricing gap 36,058 18,520 16, ,761 (1,573) GROUP 2001 ASSETS Cash and bank 5.80% 3,994 3,994 Money market deposits at call 6.20% 18,170 18,170 Interest bearing securities 6.20% 114,480 79,976 30,768 3,736 Advances to clients 5.07% 5,994 5,994 Investments in managed funds 6.06% 250, ,547 19,571 14,085 15,703 33,425 Advances secured by mortgage 7.71% 94,701 74,887 19, Other financial assets (inc. tax) n/a 5,480 5, , ,048 70,133 17,841 15,703 33,425 LIABILITIES Liability to clients 4.19% 343, ,329 8,261 Liability to clients term deposits 5.74% 84,428 53,326 30, Accrued interest n/a 1,526 1, , ,655 38, ,526 DERIVATIVES Interest rate swaps & FRAs (36,500) 36,500 Re-pricing gap 63,606 (69,107) 68,092 17,019 15,703 31,899 19

20 Notes to the Financial Statements for the period 1 July 2001 to 28 February RE-PRICING MATURITY AND INTEREST RATE MANAGEMENT (CONTINUED) PARENT 2002 Effective Total 6 months 6 to 12 1 to 2 2 to 5 Over 5 interest rate or less months years years years $000 $000 $000 $000 $000 $000 ASSETS Cash and bank 4.80% 1,995 1,995 Money market deposits at call 4.80% 15,785 15,785 Interest bearing securities 5.45% 134, ,500 18,362 5,009 Advances to clients 6.11% 3,315 3,315 Investments in managed funds 5.62% 145, ,878 Advances secured by mortgage 6.92% 163, ,840 16,982 7,370 8,553 Other financial assets (inc. tax) n/a 4,229 4, , ,542 35,344 7,370 13,562 LIABILITIES Liability to clients 3.03% 324, ,273 6,955 Liability to clients term deposits 4.79% 108,379 91,798 16,581 Accrued interest n/a 1,573 1, , ,071 23,536 1,573 DERIVATIVES Interest rate swaps & FRAs 13,629 5,132 (6,960) (11,801) Re-pricing gap 35,638 18,100 16, ,761 (1,573) PARENT 2001 ASSETS Cash and bank 5.80% 3,989 3,989 Money market deposits at call 6.20% 18,170 18,170 Interest bearing securities 6.20% 114,480 79,976 30,768 3,736 Advances to clients 5.07% 5,994 5,994 Investments in managed funds 6.06% 250, ,547 19,571 14,085 15,703 33,425 Advances secured by mortgage 7.71% 94,701 74,887 19, Other financial assets (inc. tax) n/a 5,147 5, , ,710 70,133 17,841 15,703 33,425 LIABILITIES Liability to clients 4.19% 343, ,329 8,261 Liability to clients term deposits 5.74% 84,428 53,326 30, Accrued interest n/a 1,526 1, , ,655 38, ,526 DERIVATIVES Interest rate swaps & FRAs (36,500) 36,500 Re-pricing gap 63,268 (69,445) 68,092 17,019 15,703 31,899 20

21 Notes to the Financial Statements for the period 1 July 2001 to 28 February RE-PRICING MATURITY AND INTEREST RATE MANAGEMENT (CONTINUED) Interest rate risk is managed, subject to liquidity and credit risk requirements, by matching the interest rate characteristics of financial liabilities to those of financial assets. Where no natural match can be established, interest rate swaps and forward rate agreements are entered into to simulate the natural hedge. Group & Parent Group & Parent Gain Notional Gain Notional (loss) amount (loss) amount $000 $000 $000 $000 Interest rate swaps (368) 18,761 Forward rate agreements 35 30,500 (18) 70,500 (333) 49,261 (18) 70, CREDIT RISK The Office had exposures to the following sectors: Group Parent $000 $000 $000 $000 Real estate mortgages secured by underwriting agreement 69,316 69,316 Real estate mortgages & mortgage backed securities 106, , , ,011 Advances to clients 3,315 5,994 3,315 5,994 Local authorities 3,834 6,874 3,834 6,874 Registered banks 81,329 60,953 81,323 60,948 State owned enterprises 22,172 19,850 22,172 19,850 New Zealand corporates 34,606 37,831 34,606 37,831 Other financial markets (via Public Trust managed funds) 146, , , ,949 Receivables 3,445 3,688 3,031 3, , , , ,812 Credit policy Advances secured by mortgage are secured by a first mortgage charge over freehold property in cases where the sum advanced does not exceed, at the time of the advance, 80% of the valuation of the security for residential properties; 66% for commercial and 50% for rural properties. In the event a sum advanced on a residential property exceeds 80% of the valuation, at the time of the advance, the mortgage security is supplemented by Mortgage Lenders Insurance. In no event are monies advanced above 90% of valuation. Advances to clients are secured by an assignment of their interest in the estate assets against which the advance is made, or by an unregistered charge over an asset the title to which is held by the Office. Mortgage backed securities are investment products where sums invested are secured over property and by underwriting arrangements. All other investments are senior, unsecured obligations invested with institutions meeting set credit criteria. Concentration of credit risk There were two credit exposures to registered banks between $20 and $25 million at balance date. There was one exposure to a registered bank of $10 and $15 million. There was an exposure to a New Zealand corporate between $15 and $20 million. 21

22 Notes to the Financial Statements for the period 1 July 2001 to 28 February FAIR VALUE Group 2002 Group 2001 Fair Carrying Fair Carrying value value value value $000 $000 $000 $000 FINANCIAL ASSETS Cash and bank 2,001 2,001 3,994 3,994 Money market deposits at call 15,785 15,785 18,170 18,170 Interest bearing securities (gross of derivatives) 135, , , ,498 Advances to clients 3,315 3,315 5,994 5,994 Accrued income 1,430 1,430 2,368 2,368 Trade debtors 2,072 2,072 2,258 2,258 Sundry debtors 1, Less: items not being financial instruments (590) (54) Investments in managed funds 145, , , ,331 Advances secured by mortgage (see below) 163, ,745 94,701 94,701 FINANCIAL LIABILITIES Liability to clients (see below) 324, , , ,590 Liability to clients term deposits (see below) 109, ,952 85,954 85,954 Derivatives in loss position Trade creditors 2,932 2,932 2,740 2,740 Other creditors 618 Less: items not being financial instruments (260) Provisions for employee entitlements 4,690 4,690 4,201 4,201 Other provisions 1,927 1,660 Less: items not being financial instruments (827) (266) 1,100 1,100 1,394 1,394 22

23 Notes to the Financial Statements for the period 1 July 2001 to 28 February FAIR VALUE (CONTINUED) Parent 2002 Parent 2001 Fair Carrying Fair Carrying value value value value $000 $000 $000 $000 FINANCIAL ASSETS Cash and bank 1,995 1,995 3,989 3,989 Money market deposits at call 15,785 15,785 18,170 18,170 Interest bearing securities (gross of derivatives) 135, , , ,498 Advances to clients 3,315 3,315 5,994 5,994 Accrued income 1,430 1,430 2,368 2,368 Trade debtors 1,799 1,799 1,942 1,942 Sundry debtors 1, Less: items not being financial instruments (449) (56) Investments in managed funds 145, , , ,331 Advances secured by mortgage 163, ,745 94,701 94,701 Parent 2002 Parent 2001 Fair Carrying Fair Carrying value value value value $000 $000 $000 $000 FINANCIAL LIABILITIES Liability to clients (see below) 324, , , ,590 Liability to clients term deposits (see below) 109, ,952 85,954 85,954 Derivatives in loss position Trade creditors 2,916 2,916 2,672 2,672 Other creditors 618 Less: items not being financial instruments (260) Provisions for employee entitlements 4,690 4,690 4,201 4,201 Other provisions 1,927 1,660 Less: items not being financial instruments (827) (146) 1,100 1,100 1,514 1,514 Loans from subsidiary 1,649 1, Advances secured by mortgage are difficult to value in the absence of a clearly defined market. The characteristics which are relevant in formulating a fair value include: (a) value of security, including any underwriting arrangement; (b) historical record of loss in the portfolio; (c) the interest rate characteristics; (d) prepayment momentum; (e) the sector of the economy (e.g. private residential or commercial) and; (f) to some extent geographical location. The Office s experience in acquiring a mortgage portfolio indicates that the effort necessary to establish these variables leads to protracted negotiation, due diligence and legal effort. Liabilities to clients are very difficult to value. Theoretically the value of such liabilities would be a function of interest rate payable and the economic and not legal duration of the interval between the time of receipt and settlement. Deposits taken by the Office are subject to a government guarantee and would therefore be valued in accordance with liabilities of the Crown. Because the deposits often carry interest rates lower than the Crown, a fair valuation, based upon realistic estimates of longevity, would suggest that such liabilities have a fair value less than the carrying value. This would be potentially misleading. Liabilities pertaining to estates are also government guaranteed but even more difficult to value as the duration is set by the pace at which the Office completes its work and, are essentially, not able to be disposed of in the way other liabilities might be. 23

24 Notes to the Financial Statements for the period 1 July 2001 to 28 February REVENUES ARISING AND EXPENSES INCURRED IN ARRIVING AT NET DEFICIT In addition to the items on the face of the Statement of Financial Performance, net deficit is stated after charging or crediting the following: Group Parent $000 $000 $000 $000 Audit fees Other fees paid to auditors Directors remuneration Bad debts Movement in general provision Recovery of debt previously written off (31) (31) Net charge Remuneration 19,725 24,538 19,725 24,538 Modernisation cost 1, , Accelerated depreciation Group Parent $000 $000 $000 $000 EFFECTS OF CHANGES IN ACCOUNTING POLICY: Loss arising from marking investments to market 3,176 3,176 Recognition of at risk salaries Discounting of long term deferred charges Discounting of vacant space obligations (144) (144) Expenditure on information technology not capitalised AMORTISATION OF INTANGIBLE Retrospective charge arising from change in accounting policy 833 Current year charge 445 1,278 Group Parent $000 $000 $000 $000 GAINS (LOSSES) ON INVESTMENTS Realised (losses) (2,571) (2,571) Less: provision for unrealised loss brought forward 3,176 3,176 Realised gains (losses) from disposal of securities 605 (384) 605 (384) Unrealised gains (losses) from revaluing securities 12 (3,176) 12 (3,176) 617 (3,560) 617 (3,560) TOTAL OPERATING REVENUE Total interest and distributions 18,262 31,939 18,260 31,939 Total fee and other revenues 23,157 35,619 22,541 35,517 41,419 67,558 40,801 67,456 Sale value of financial assets is not distinguished from maturities and therefore the revenue from such disposals is not included in operating revenue. 24

25 Notes to the Financial Statements for the period 1 July 2001 to 28 February TAX Group Parent $000 $000 $000 $000 Operating deficit before tax (7,056) (5,591) (7,889) (4,924) Income tax at 33% (2,328) (1,845) (2,603) (1,625) Add/(deduct) tax effect of permanent differences Non-deductible expenses Net effect of imputation credits 2 (46) 2 (46) Tax effect of timing differences not recognised 1,230 1,443 1,313 1,303 Tax effect of losses not recognised 1, , Set-off of inter-company losses Imputation credit account Opening balance 120 Credits foregone due to loss of shareholder continuity (42) Income tax refund (78) The Office has not recognised losses and timing differences to a value of $13.5 million (2001: $10.3 million) the tax effect of which amounts to $4.5 million as at 28 February 2002 (2001: $3.4 million). These losses are not available to be carried forward to relieve surpluses generated by the successor entity, Public Trust. 25

26 Notes to the Financial Statements for the period 1 July 2001 to 28 February RECONCILIATION OF OPERATING SURPLUS TO NET CASH FLOW FROM OPERATING ACTIVITIES Group Parent $000 $000 $000 $000 Net deficit (7,056) (5,591) (7,889) (4,924) Items relating to property, plant & equipment Depreciation 2,221 4,024 2,221 4,024 Loss on sale of property, plant & equipment Impairment losses GST on capital creditor (1) (1) Items relating to investment in subsidiary Amortisation of goodwill ,278 Equity accounted earnings (582) Items relating to investments Realised (gains) losses on disposal of investments (605) 384 (605) 384 Unrealised (gains) losses on investments (12) 3,176 (12) 3,176 Amortisation of premiums & discounts Change in general provision for doubtful debts Other items Decrease (increase) in inventory 64 (64) 64 (64) Decrease (increase) in accrued income 1,076 (1,269) 1,076 (1,391) (Increase) decrease in debtors & prepayments (326) (284) (245) 127 Increase in creditors & accruals 868 1, ,598 Increase (decrease) in provisions for employee entitlements 489 (744) 489 (744) Increase in other provisions Net cash flows from operating activities (1,679) 2,122 (2,128) 2,565 Group Parent $000 $000 Accrued income Opening balance 2,368 2,368 Closing balance 1,430 1,430 Movement Purchased accrued income ,076 1,076 26

27 Notes to the Financial Statements for the period 1 July 2001 to 28 February RECONCILIATION OF OPERATING SURPLUS TO NET CASH FLOW FROM OPERATING ACTIVITIES (CONTINUED) Group Parent $000 $000 Debtors & prepayment Opening balance Trade debtors 2,258 1,942 Sundry debtors Prepayments ,815 3,482 Closing balance Trade debtors 2,072 1,799 Sundry debtors 1,141 1,000 Prepayments ,821 3,407 Movement (6) 75 Treated as investment proceeds (320) (320) (326) (245) Creditors Opening balance Accrued interest 1,526 1,526 Trade creditors 2,740 2,672 Less: creditor for property, plant & equipment (306) (306) 3,960 3,892 Closing balance Accrued interest 1,573 1,573 Trade creditors 2,932 2,916 Less: creditor for property, plant & equipment (295) (295) Other creditors ,828 4,812 Movement LEASE COMMITMENTS Group Parent $000 $000 $000 $000 Payable within 1 year 4,704 3,777 4,704 3,777 Payable within 1 2 years 3,118 3,328 3,118 3,328 Payable within 2 5 years 3,795 5,104 3,795 5,104 Payable after 5 years ,019 12,578 12,019 12,578 The operating lease maturity table includes those leases recognised as liabilities within the vacant space provision. 27

28 Notes to the Financial Statements for the period 1 July 2001 to 28 February RELATED PARTIES By virtue of ownership the Crown is considered to have significant influence over the Office. Accordingly the Crown and all of its related parties are related parties of the Office. Transactions with all of these related parties are pervasive and it is not practical to isolate and report on them. All such transactions are carried out on an arm s length basis. The investment vehicle in which the investment described as Investment in managed funds is considered to be a related party because the Office manages the relevant fund and owns 90% of the sums invested by the fund and, thereby, is considered to have significant influence. The balances are as given in the Statement of Financial Position. The income is described as Distributions of managed funds in the Statement of Financial Performance. A loss of $3,277,000 was realised on the equivalent investment at June 2001 during the year. This had previously been taken up as an unrealised loss of $3,233,000 in that previous year. The Office, as parent, owns all of the shares of New Zealand Permanent Trustees. Accordingly, the Office has significant influence with that company and both entities are therefore related parties. Balances due from and by that company are given on the Statement of Financial Position. The Office supplies all facilities to the company for which it charged $324,000 in management fees (2001: $575,000). 18 SEGMENTAL REPORTING The Office operated and Public Trust will continue to operate predominantly in the business of managing estates and other trusts. It engaged, and Public Trust will continue to engage, in related businesses such as trustee services; management of investment funds and the taking of deposits. 19 CONTINGENT ASSETS The Office does not recognise such asset as may arise in work performed not yet billed to estates or other clients. No systems are available to allow such an asset, if one exists, to be reliably measured. The Board of the Public Trust will investigate the validity of measuring and recognising such an asset in the future. 20 CONTINGENT LIABILITIES Residual uncertainties as to the taxation effects of the dissolution of the Public Trust Office by the Public Trust Act 2001 are under discussion with Inland Revenue. The estimated potential liability is $2 million, together with any applicable additional charges. 28

29 Notes to the Financial Statements for the period 1 July 2001 to 28 February CHANGES IN COMPARATIVES... The prior year Statement of Financial Position has been adjusted as follows: GROUP Per Dr (Cr) 2001 note a note b note c note d note e note f note g note h note i note j note k Restated $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 Accrued income 3,198 (194) (319) (316) 2,369 Debtors & prepayments 1, (703) (123) Other non-current assets 3,148 (1,748) (1,400) 0 Trade debtors 1, ,258 Prepayments Property, plant & equipment 10,028 1,400 (813) 10,615 Mortgages 100, (5,994) 94,701 Advances 5,994 5,994 Provisions (6,554) (120) 813 (5,861) Liability to clients (429,544) 85,954 (343,590) Liability to clients term deposits (84,428) (84,428) Accrued interest (1,526) (1,526) Creditors (2,686) (54) (2,740) 29

30 Notes to the Financial Statements for the period 1 July 2001 to 28 February CHANGES IN COMPARATIVES (CONTINUED)... PARENT Per Dr (Cr) 2001 note a note b note d note e note f note g note h note i note j note k note l Restated $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 Accrued income 2,881 (194) (319) 2,368 Debtors & prepayments 1, (703) (123) Other non-current assets 3,148 (1,748) (1,400) 0 Trade debtors 1,942 1,942 Prepayments Property, plant & equipment 10,028 1,400 (813) 10,615 Mortgages 100, (5,994) 94,701 Advances 5,994 5,994 Provisions (6,554) (120) 813 (5,861) Liability to clients (429,544) 85,954 (343,590) Liability to clients term deposits (84,428) (84,428) Accrued interest (1,526) (1,526) Creditors (3,502) (56) 885 (2,673) Loans from NZ Permanent Trustee (885) (885) 30

31 Notes to the Financial Statements for the period 1 July 2001 to 28 February CHANGES IN COMPARATIVES (CONTINUED) Notes (a) The sum in question represents long term receivables. As the Statement of Financial Position has been represented in broad order of liquidity, the non-current element has been reunited with the current element. (b) The sum in question is a dividend from an insolvent estate in which the Office had invested. It is thought more precisely to term this a sundry debtor. (c) This amount represents fees receivable and it is thought better to distinguish it from accrued interest. (d) Prepayments are allocated their own line on the Statement of Financial Position. (e) The amount is a mortgage instalment, which has been added to mortgages as it was subject to the same security as the other components of advances secured by mortgage. (f) The amount was a receivable from the Office s underwriters that is better shown gross, as it did not relate to the provisions within which it had been set. (g) Work in progress has been reclassified as property, plant & equipment on the basis that this class more closely describes its nature. (h) A sum of accelerated depreciation was previously carried as a credit balance within provisions. This has now been set against the assets to which it relates. (i) Advances secured other than by mortgages have been allocated their own line on the Statement of Financial Position on the basis that these assets do not enjoy the same level of security. (j) Term deposits have been separated from liabilities at call to make the Office more transparent. (k) GST receivable has been reclassified as a receivable. (l) Loans due from the significant subsidiary have been allocated their own line on the Statement of Financial Position. Leasehold commitments The leasehold commitment maturity profile has been restated so that the separate years 2 to 5 have been aggregated together to make the table consistent with the format of other liquidity and maturity profiles. Statement of Cash Flows GST has been separately identified in the comparative. Statement of Financial Performance Depreciation in the year to 30 June 2001 was reported exclusive of $813,000 of accelerated depreciation relating to the alignment of lease fixture and fittings depreciation rates with the life of the leases. This sum has been added to the depreciation figure disclosed. Note 14 Tax The reconciliation of accounting deficit to tax charge has been altered to separately identify inter-company tax loss offset. This has been done to achieve a greater degree of clarity. 31

32 Report of the Auditor-General To the Readers of the Financial Statements of Public Trust Office and Group for the Period Ended 28 February 2002 We have audited the financial statements on pages 8 to 31. The financial statements provide information about the past financial performance and financial position of the Public Trust Office ( the Office ) and group as at 28 February This information is stated in accordance with the accounting policies set out on pages 12 to 14. Responsibilities of the Board of Directors The Public Trust Act 2001 and the Financial Reporting Act 1993 require the Board of Directors (the Board) to prepare financial statements in accordance with generally accepted accounting practice in New Zealand that fairly reflect the financial position of the Office and group as at 28 February 2002 and the results of operations and cash flows for the period ended on that date. Auditor s Responsibilities Section 15 of the Public Audit Act 2001 and Section 39 of the Public Trust Act 2001 requires the Auditor-General to audit the financial statements presented by the Board. It is the responsibility of the Auditor-General to express an independent opinion on the financial statements and report that opinion to you. The Auditor-General has appointed Simon RL O Connor, of Ernst & Young, to undertake the audit. Basis of Opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: the significant estimates and judgements made by the Board in the preparation of the financial statements; and whether the accounting policies are appropriate to the Office s and group s circumstances, consistently applied and adequately disclosed. We conducted our audit in accordance with the Auditing Standards published by the Auditor- General, which incorporate the Auditing Standards issued by the Institute of Chartered Accountants of New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. Ernst & Young has undertaken a taxation assurance assignment for the Office. Other than in our capacity as auditor acting on behalf of the Auditor-General and provider of taxation assurance, we have no relationship with or interest in the Office or its subsidiary. 32