Reporting entity

The Department of Labour is a government department as defined by section 2 of the Public Finance Act 1989. These are the financial statements of the Department of Labour prepared pursuant to the Public Finance Act 1989. In addition, the Department has reported the trust monies and memorandum account which it administers, and separate schedules for non-departmental activities.

Measurement system

The financial statements have been prepared on a modified historical cost basis except for certain items with specific accounting policies outlined below.

Accounting policies

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

1. Budget figures
   The Budget figures are those presented in the Main Estimates and those amended by the Supplementary Estimates and any transfer made by Order in Council under the Public Finance Act 1989.
2. Revenue
   The Department derives revenue through the provision of outputs to the Crown, for immigration services, sale of publications to third parties and interest received from Westpac Trust and overseas bank accounts. Such revenue is recognised when earned and is reported in the financial period to which it relates.
3. Fixed assets
   Land and buildings are stated at fair value as determined by an independent registered valuer. Fair value is determined using market-based evidence. Freehold properties (land and buildings) in New Zealand and overseas are individually revalued on a three-yearly cycle.
   
   The results of revaluing land and buildings are credited or debited to an asset revaluation reserve for that class of asset. Where a revaluation results in a debit balance in the revaluation reserve, the debit balance will be expensed in the Statement of Financial Performance.
   
   Other fixed assets are recorded at cost less accumulated depreciation. Fixed assets forming part of a network which are material in aggregate, costing more than $5,000, are capitalised and recorded at cost.
   
   Any write-down of an item to its recoverable amount is recognised in the Statement of Financial Performance.
4. Depreciation
   Depreciation is provided on a straight-line basis on all fixed assets, other than freehold land and items under construction, at a rate which will write off the cost (or valuation) of the assets to their estimated residual value over their useful lives.
   
   Leasehold improvements are depreciated over the shorter of the unexpired period of the lease and the estimated useful life of the improvements.
   
   The useful lives and associated depreciation rates of the major classes of assets have been estimated as follows:

5. Operating leases
   Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased items are classified as operating leases. The Department leases office premises and office equipment. Payments arising from operating lease commitments are charged against earnings in the periods in which they are incurred over the period of the lease.
6. Finance leases
   Leases which effectively transfer to the Department substantially all the risks and benefits incident to ownership of the leased items are classified as finance leases. These are capitalised at the lower of the fair value of the asset or the present value of the minimum lease payments. The leased assets and the corresponding lease liabilities are recognised in the Statement of Financial Position. The leased assets are depreciated over the period the Department is expected to benefit from their use.
7. Taxation
   Government departments are exempt from the payment of income tax in terms of the Income Tax Act 1994. Accordingly, no charge for income tax has been provided for.
8. Goods and services tax (GST)
   All items in the financial statements are exclusive of GST, with the exception of receivables and payables, which are stated as GST inclusive. Where GST is not recoverable as an input tax, then it is recognised as part of the related asset or expense.
9. Debtors and receivables
   Receivables are recorded at estimated realisable value after providing, where necessary, for doubtful and uncollectible debts.
10. Foreign currencies
    Transactions covered by forward exchange contracts are measured and reported at the forward rates specified in those contracts. All other foreign currency transactions are converted into New Zealand dollars at average rates for the month of the transaction approximating the exchange rate at the date of the transaction.
    
    At balance date, monetary assets and liabilities in foreign currencies are translated to New Zealand dollars at the closing exchange rate. The resulting unrealised exchange gain or loss is recognised in the Statement of Financial Performance. Other exchange gains or losses, whether realised or unrealised, are recognised in the Statement of Financial Performance in the period to which they relate.
11. Financial instruments
    The Department is party to financial instruments as part of its normal operations. These financial instruments include bank accounts, short-term deposits, debtors, creditors and foreign currency forward contracts. All revenues and expenses in relation to financial instruments are recognised in the Statement of Financial Performance.
    
    Except for those items covered by a separate accounting policy, all financial instruments are shown at their estimated fair value.
12. Commitments
    Future expenses and liabilities to be incurred on contracts that have been entered into at balance date are disclosed as commitments (at the point a contractual obligation arises) to the extent that there are equally unperformed obligations. Commitments relating to employment contracts are not disclosed.
13. Contingent liabilities and assets
    Contingent liabilities and assets are disclosed at the point at which the contingency is evident.
14. Cost accounting policies
    The Department's accounting systems record costs by outputs. The costs may be direct or indirect. Costs that can be casually linked and assigned to an output economically are direct costs. Costs incurred to produce more than one output are indirect costs. Indirect costs are allocated to outputs according to staff numbers, the amount of resource consumption or use. The direct costs of personnel, operating, depreciation and capital charge are assigned directly to outputs. Indirect costs are corporate costs that are mainly shared across all workgroups. For the year ended 30 June 2007, direct costs accounted for 81% of the Department's costs (2006: 81%).
15. Employee entitlements
    Provision is made in respect of the Department's liability for annual, long service and retirement leave. Annual leave and other entitlements that are expected to be settled within 12 months of reporting date are measured at nominal values on an actual entitlement basis at current rates of pay.
    
    Entitlements that are payable beyond 12 months, such as long service leave and retirement leave, have been calculated on an actuarial basis on present value of expected future entitlements.
16. Restructuring provisions
    A provision for restructuring is recognised when the Department has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that is will carry out the restructuring by starting to implement the plan, or announcing its main features to those affected by it.
17. Taxpayers' funds
    This is the Crown's net investment in the Department.

Changes in accounting policies

There have been no changes in accounting policies, including cost allocation accounting policies, since the date of the last audited financial statements. All policies have been applied on a basis consistent with other years.

Note 1: Revenue - Department

Note 2: Revenue - Other

Note 3: Operating Costs

* The Department has also capitalised $15,068 worth of fees from Audit New Zealand, the Department's external auditor, for assurance work done in relation to the Work Info project (2006: $22,800).

Note 4: Depreciation

Note 5: Capital Charge

The capital charge represents a charge by the Crown on its taxpayers' funds as at 30 June and 31 December each year. The capital charge rate for 2007 was 7.5% (2006: 8.0%).

Credit risk

Financial instruments, which potentially subject the Department of Labour to credit risk, principally consist of cash on hand, bank balances, forward exchange contracts and accounts receivable. There were no major concentrations of credit risk with respect to accounts receivable.

The risk that a bank with which funds are deposited will fail or that a party with which future or current transactions are outstanding will not meet its obligations is minimised by only opening accounts with banks following Treasury approval.

The Department deals only, where there is a choice, with banks that have a high credit standing. Exposure to any one counterparty is limited to NZ$5 million including unsettled forward exchange contracts, bank account balances and contracts due for settlement on the day the exposure is calculated. This limit does not apply when the counterparty is the Westpac New Zealand, New Zealand Debt Management Office (NZDMO) or the Reserve Bank of New Zealand.

Interest Rate Risk

The Department has no interest rate risk as it neither borrows nor invests monies.

Fair value

Estimated fair values of the Department's financial assets and liabilities as at 30 June 2007 equate with the carrying amounts reflected in these financial statements.

Currency risk

The Department operates foreign currency bank accounts to support the operations of the overseas branches of the Immigration Service. For business continuity reasons, balances of up to an average month's expenses for each branch may be retained in the branch foreign currency bank account. All material foreign exchange transaction exposures arising in the normal course of business are identified as early as possible in the budgetary cycle. The Department may utilise forward contracts to hedge exposures when recognised. Forward exchange contracts are not captured in the Statement of Financial Position. Forward contracts in place at balance date and the respective fair values at that date are as per the following schedule. The NZDMO provided the market valuations of these instruments.

All significant overseas operating lease commitments are listed below, along with all foreign bank account balances as at 30 June 2007.

Statement of Financial Performance

The variance in Revenue - Other of $5.125 million, or 6%, resulted primarily from lower immigration fees received.

The variance in Personnel costs of $7.869 million, or 6% was due to a misclassification that occurred in the reporting of the supplementary estimates. The variance in Personnel costs should be considered in conjunction with the variance in Operating Costs of $1.851 million or 2%.

Total expenditure was below budget by $7.240 million or 2%. This variance is due to various remeasurements of $800,000 as explained in Note 9 and an underspend in the following Votes: Vote Labour ($1.540 million), Vote Immigration ($3.493 million), Vote Employment ($1.112 million) and Vote ACC ($0.093 million). Some of the variance also relates to the following pre-approved in-principle transfers to 2007/08.

Measurement system

Measurement and recognition rules applied in the preparation of these non-departmental statements and schedules are consistent with generally accepted accounting practice and Crown accounting policies.

Accounting policies

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

1. Budget figures
   The Budget figures are those presented in the Budget Night Estimates (Main Estimates) and those amended by the Supplementary Estimates and any transfer made by Order in Council under the Public Finance Act 1989.
2. Revenue
   The Department collects revenue on behalf of the Crown. This revenue includes the Health and Safety in Employment Levy and the Migrant Levy, which are legislated under the Health and Safety in Employment Act 1992 (section 59) and the Immigration Act 1987 (section 149B) respectively. Revenue is recognised when earned and is reported in the financial period to which it relates.
3. Goods and services tax (GST)
   All items in the schedules are exclusive of GST, with the exception of receivables and payables, which are stated as GST inclusive. Where GST is not recoverable as an input tax, it is recognised as an expense.
4. Debtors and receivables
   Receivables are recorded at estimated realisable value after providing, where necessary, for doubtful and uncollectible debts.
5. Commitments
   Future expenses and liabilities to be incurred on contracts that have been entered into at balance date are disclosed as commitments (at the point a contractual obligation arises) to the extent that there are equally unperformed obligations. Commitments relating to employment contracts are not disclosed.
6. Contingent liabilities
   Contingent liabilities are disclosed at the point at which the contingency is evident.

Changes in accounting policies

There have been no changes in accounting policies since the date of the last audited financial statements. All policies have been applied on a basis consistent with other years.

1: Receivables and Prepayments

2: Creditors and Payables

3: Provisions for employee entitlements

4: Vote ACC

Funding is provided by the government through the Department of Labour to ACC for costs relating to the Non-Earners Account. The Non-Earners Account covers all personal injuries to people not in the paid workforce - students, beneficiaries, older people and children.

For claims that originated after 1 July 2001, ACC funding is provided based on an actuarial assessment of the whole-of-life cost. This is reassessed annually and funding appropriated from the Crown and provided to ACC. This is referred to as 'fully funded' and cost $672.299 million in 2007 (2006: $600.821 million).

For claims that originated prior to 1 July 2001, ACC funding is provided to cover the costs relating to claims in the year the costs are incurred. The cost of this is assessed during the year and appropriation sought from the crown and funding provided to ACC. This is referred to as 'pay as you go' and in 2007 cost $105.892 million (2006: $92.906 million).

5: Explanation of Major Budget Changes

A full list of all budget variances can be found in the Supplementary Estimates of Appropriations, B7 Volume 1 under each Vote. Other major budget variances between the 2006/07 Main Estimates and the 2006/07 Supplementary Estimates are as follows:

6: Explanation of Significant Actual Variations

The following notes explain the significant variances between Supplementary Estimates and Actuals.

7: Post balance date events

There were no post balance date events occurring between year-end and the signing of the financial statements that would have a significant effect on these non-departmental statements.

Background

New Zealand accounting standard-setting bodies have announced that New Zealand reporting entities will be required to adopt New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) for financial years commencing after 1 January 2007. Differences between NZ IFRS and the current accounting standards mean that many reporting entities in New Zealand, including the Department will account for and disclose some transactions differently.

The purpose of this statement is to outline the transitional requirements and the Department's plans for the transition to NZ IFRS, and to highlight the key reporting changes which will affect the Department when it reports under NZ IFRS for the first time in the financial year beginning 1 July 2007.

Transitional requirements and plans

When publishing its first set of NZ IFRS compliant financial statements for the year ended 30 June 2008, the Department will be required to:

• restate all of the 30 June 2006 closing balances in the Statement of Financial position, which have been prepared under current accounting rules
• compile NZ IFRS compliant financial information for the period commencing 1 July 2006, which will be used as comparative information in the financial statements for the period ending 30 June 2008.

To prepare for the transitional requirements and to consider the implications of NZ IFRS, the Department has established a project team which reports to the Department's Audit Committee on a quarterly basis. The Audit Committee has the overall governance responsibility for the oversight and review of the Department's financial statements, including the transition to NZ IFRS.

Key reporting changes

Over the last two financial years, the project team, in conjunction with external professional advisors, has reviewed NZ IFRS to identify which standards are applicable and which standards will result in significant changes for the Department. The Department is a public benefit entity for the purposes of NZ IFRS and intends to take advantage of all available reporting exemptions.

In accordance with FRS 41: Disclosing the impact of adopting New Zealand equivalents to international financial reporting standards, the key areas where accounting policies will change and will have an impact on the financial statements are:

• the recognition of forward exchange contracts
• the measurement of the Department's liability under the ACC Partnership Programme
• the recognition of sick leave entitlements
• the recognition of inventories held for distribution
• the derecognition of some website development costs.

In addition to the above, additional disclosures will be required and some computer software will be reclassified as an intangible asset.

The estimated financial impact on the Departmental financial statements of the adoption of NZ IFRS is shown in the following table. This highlights a reconciliation of equity, at the beginning of the transition period (1 July 2006) under previous NZ GAAP, to equity under NZ IFRS.

There is no estimated material financial impact on the opening non-departmental asset and liability schedules as at 1 July 2006 as a result of the transition to NZ IFRS.

Cautionary note

The information provided in this statement should not be taken as an exhaustive list of all the differences between current accounting rules and NZ IFRS. A full transition note including the effect of NZ IFRS on the financial information prepared for the year-ended 30 June 2007 will be disclosed in the annual report for the year-ended 30 June 2008. The implementation cost of implementing NZ IFRS has not yet been fully quantified. In addition, NZ IFRS may change between the date of issuing these statements and the date of adoption.

a: Recognition of forward exchange contracts

In accordance with NZ IAS 39: Financial instruments: recognition and measurement, the Department has recognised its forward exchange contracts in the Statement of Financial Position at fair value. Under NZ GAAP, these were not recognised but disclosed in the notes to the financial statements.

b: Inventory

In accordance with NZ IAS 2: Inventories, the Department has recognised the publications and brochures that it gives away to the public as inventories held for distribution. Inventories held for distribution are assets:

• held for distribution at no or nominal consideration in the ordinary course of operations
• in the process of production for distribution at no or nominal consideration in the ordinary course of operations
• in the form of material or supplies to be consumed in the production process or in the rendering of services at no or nominal consideration.

Under NZ GAAP these were not recognised as an asset.

c: Property, plant and equipment

In accordance with NZ IAS 1: Presentation of financial statements, the Department has classified vehicles which are expected to be sold in the next 12 months as a current asset. Under NZ GAAP, these were classified as non-current assets.

The vehicles expected to be disposed of in the next 12 months do not meet the definition of assets held for sale as a sale is not highly probable. The vehicles were not actively marketed for sale at 1 July 2006 and 1 July 2007.

In accordance with NZ SIC 32: Web site costs, the Department has derecognised some web site development costs. These costs relate to the development of the NZ Now web site, which does not generate any revenues for the Department and is not transactional in nature, other than giving users the ability to download general information on New Zealand and the Department's general services.

d: Intangible assets

In accordance with NZ IAS 38: Intangible assets, the Department has classified its computer software as an intangible asset. Previously, computer software was treated as a separate class of asset within property, plant and equipment.

e: Trade and other payables

The Department has chosen to reclassify the provision for repayment of surplus to the Crown and include it within Trade and other payables.

f: Insurance liabilities

The Department has remeasured its liability for work-related injury claims under the ACC Partnership Programme in accordance with the specific measurement guidance under NZ IFRS 4: Insurance activities. Under NZ GAAP, an estimate of the liability was made in accordance with FRS 15: Provisions, contingent liabilities and contingent assets.

In addition, the Department has presented the liability in accordance with the current and non-current definitions outlined in NZ IAS 1: Presentation of financial statements. Under NZ GAAP, the liability was included under other provisions.

g: Employee entitlements

In accordance with NZ IAS 19: Employee benefits, the Department has recognised accumulating sick leave as a liability. Accumulating sick leave is any sick leave which can be carried forward and can be used in future periods if the current period's entitlement is not used in full. Under NZ GAAP, no provision for sick leave was recognised.