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2005 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 30 June 2005

NOTE 1 STATEMENT OF ACCOUNTING POLICIES

(a): Reporting Entity

The financial statements presented here for the reporting entity, the Securities Commission, are prepared pursuant to section 30 of the Securities Act 1978 and section 41 of the Public Finance Act 1989.

(b): Measurement System

The accounting principles recognised as appropriate for the measurement and reporting of results and financial position on a cost basis have been applied with the exception that the library is periodically revalued.

(c)
Accounting Policies

(i): Budget Figures: The budget figures are those approved by Commission Members on 18 July 2004.

The budget figures are prepared in accordance with generally accepted accounting practice and are consistent with the accounting policies adopted by Commission Members for the preparation of the financial statements.
(ii): Depreciation: Fixed assets, other than the library, are shown at cost and have been depreciated on the following bases:
- office furniture - 20 percent of diminishing value,
- office equipment - straight line over three years,
- leasehold improvements - straight line over remaining life of lease,
- motor vehicle - straight line over five years.
(iii): Library: All library acquisitions are recorded at cost. The library is depreciated on a straight line basis over ten years. The library is revalued to fair value every three years by Lambert Library Services (independent valuer). In the year that the periodic revaluation of the library is undertaken any difference between the depreciated value of the library and the fair value is recognised in the asset revaluation reserve. If this results in a debit balance in the asset revaluation reserve, the balance is expensed in the statement of financial performance. The last revaluation was as at 30 June 2004.
(iv): Short Term Deposits: Short term deposits are shown at cost.
(v): Employee Annual Leave: Provision is made in respect of the Commission's liability for employee annual leave entitlements. This has been calculated on an actual entitlement basis at current remuneration rates.
(vi): GST: All items in financial statements are exclusive of GST with the exception of accounts receivable and accounts payable which are stated with GST included.
(vii): Financial Instruments: All financial instruments are recognised in the statement of financial position and all revenues and expenses in relation to financial instruments are recognised in the statement of financial performance.
(viii): Income Tax: The Commission is exempt from income tax under the Income Tax Act 1994.
(ix): Revenue Recognition: Government grant is recognised as revenue when earned and is reported in the financial period to which it relates. Revenue from application fees and costs recoverable and from administrative services to the Takeovers Panel is recognised when the relevant services are provided.
(x): Litigation Fund: Interest income is reported as income of the Securities Commission in the financial period in which it is derived. Reimbursements from the Crown to top up the fund are shown as income in the period in which the Commission's claim for reimbursement is accepted by the Crown. The balance of the fund is disclosed as a component of equity in the statement of financial position.
(xi): Changes in Accounting Policy: 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.

NOTE 2 ADMINISTRATIVE SERVICES TO THE TAKEOVERS PANEL

The Commission provides administrative services to the Takeovers Panel. For each financial year the Commission and the Panel agree on the level of services required and on the fees to be paid to the Commission for these services. The costs involved in providing these services are part of total expenditure.

NOTE 3 ALLOCATION OF RECEIPT FOR USE OF ASSETS

This represents amounts received from the Takeovers Panel to finance the purchase of assets required by the Commission to service the requirements of the Panel. The prepayment is being amortised, having regard to the expected life of the assets over the following periods:

Furniture, fittings and library	5 years
Office equipment	3 years

The balance of the unamortised amount was written off during the 2004 year.

NOTE 4 ALLOCATION OF RENT HOLIDAY

This represents amounts received from the landlord for a rent holiday. The accrual is being released having regard to the expected life of the lease of 9 years.

NOTE 5 LITIGATION FUND

This represents government funding to cover the costs and expenses incurred by the Securities Commission in taking or defending eligible cases. It is being held on short term deposit. There have been four calls on the resources of the litigation fund to date.

	2005 $	2004 $

Opening balance	843,750	871,873
Government grant received	1,692,368	218,510
Interest, and miscellaneous income received	31,772	43,296
Expenditure on approved litigation	(1,724,140)	(289,929)

Closing balance	$843,750	$843,750

NOTE 6 REMUNERATION OF MEMBERS OF THE COMMISSION

	2005 $	2004 $

Members' fees	313,835	321,811
Chairman's remuneration (salary and motor vehicle allowance)	330,000	307,840

Total remuneration paid to Commission Members	$643,835	$629,651

Members are remunerated on the basis of time spent on the work of the Commission.

Members' fees for the year ended 30 June 2005 were:

	2005 $	2004 $

C.A.N. Beyer	44,467	45,905
F.R.S. Clouston	46,985	56,751
M. Chen	28,115	18,818
A.M. Cotton	45,090	45,930
K.D. Dunstan	33,384	32,802
L.A.J. Kavanagh	22,967	24,050
J.M.G. Perry	22,082	24,664
C.A. Quinn	37,825	27,096
R.M. Spiller	28,640	41,746
M.R.H. Webb	-	4,049
N. Todd	2,140	-
D. Jackson	2,140	-

	$313,835	$321,811

NOTE 7 EMPLOYEE REMUNERATION

During the year, the number of employees of the Commission, not being Members, who received remuneration and other benefits in excess of $100,000 were:

Remuneration $	Number of Employees 2005	Number of Employees 2004
170,001 to 180,000	1	-
160,001 to 170,000	–	1
150,001 to 160,000	3	-
140,001 to 150,000	-	3
130,001 to 140,000	-	-
120,001 to 130,000	-	-
110,001 to 120,000	2	1
100,001 to 110,000	–	2

NOTE 8

RECONCILIATION OF THE NET DEFICIT FROM OPERATIONS WITH THE NET CASH FLOWS FROM OPERATING ACTIVITIES

	2005 $	2004 $

Reported surplus (deficit)	21,712	(47,872)

Add (less) non-cash items:
- Allocation of receipt for use of assets	-	(25,177)
- Allocation of receipt of rent free period	(12,992)
- Depreciation	410,684	331,587

	397,692	306,410

Add (less)movement in working capital:
- Increase (decrease) in creditors	304,569	(32,672)
- Decrease (increase) in receivables	(153,666)	(152,919)

	150,903	(185,591)

Add (less) investing activity items
- Gain on sale of assets	(7,658)	(84,174)

	(7,658)	(84,174)

Net cash flows from operating activities	$562,649	$(11,227)

NOTE 9 FIXED ASSETS

	2005 Cost/ Valuation $	2005 Accumulated Depreciation $	2005 Net Book Value $

Assets at cost
Office equipment	770,903	474,284	296,619
Office furniture	435,488	155,447	280,041
Leasehold improvements	1,250,897	199,116	1,051,781
Motor vehicle	64,000	8,533	55,467
Assets at valuation
Library	185,443	17,253	168,190

	$2,706,731	$854,633	$1,852,097

	2004 Cost/ Valuation $	2004 Accumulated Depreciation $	2004 Net Book Value $

Assets at cost
Office equipment	599,471	303,610	295,861
Office furniture	392,015	90,846	301,169
Leasehold improvements	1,146,749	65,679	1,081,070
Motor vehicle	64,000	35,200	28,800
Assets at valuation
Library	155,754	–	155,754

	$2,357,989	$495,335	$1,862,654

NOTE 10 ASSET REVALUATION RESERVE

	2005 $	2004 $

Opening balance	44,330	87,496
Increase (decrease) in revaluation reserve	-	(43,166)

Closing balance	$44,330	$44,330

NOTE 11 CREDITORS AND ACCRUALS

	2005 $	2004 $

Creditors	438,747	131,410
Employee entitlements	101,015	103,783

	$539,762	$235,193

NOTE 12 CASH FLOWS

Cash means cash balances on hand, held in bank accounts in which the Commission invests as part of its day-today cash management. This excludes any term deposits held by the Commission.

Investing activities are those activities relating to the acquisition and disposal of current and non-current securities and any other non-current assets.

Financing activities are those activities relating to changes in equity structure of the Commission and those activities relating to the cost of servicing Commission’s equity capital.

Operating activities include all activities other than investing and financing activities. The cash inflows include all receipts from the sale of goods and services and other sources of revenue that support the Commission’s operating activities. Cash outflows include payments made to employees, suppliers and for taxes.

NOTE 13 FINANCIAL INSTRUMENTS

(a): Credit Risk
Financial instruments which may subject the Commission to credit risk consist of bank balances, bank short term deposits and accounts receivable.
The Commission’s investments are deposited with a registered bank in New Zealand.
The Commission does not require collateral or security to support financial instruments.
There is no significant concentration of credit risk pertaining to accounts receivable.
(b): Interest Rate Risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interestrates. There are no interest rate options or interest rate swap options in place as at 30 June 2005 (2004 - Nil). The weighted average effective interest rate on short term deposits is 6.65% 2004- 5.44%).

The Commission does not consider that there is any significant interest exposure on the Commission's short term deposits.
(c): Fair Values
All financial instruments are recognised in the statement of financial position and are stated at fair values.

NOTE 14 LEASE COMMITMENTS

The Commission has the following operating lease commitments:

	2005 $	2004 $

- Not later than 1 year	514,500	514,500
- Later than 1 year and not later than 2 years	514,500	514,500
- Later than 2 years and not later than 5 years	1,543,500	1,543,500
- Later than 5 years and not later than 9 years	1,329,125	1,843,625

NOTE 15 CAPITAL COMMITMENTS

Estimated capital expenditure contracted for at balance date but not provided for: $ NIL (2004 - NIL).

NOTE 16 CONTINGENT LIABILITIES

There are no contingent liabilities at balance date. (2004 - NIL).

NOTE 17 TRANSACTIONS WITH RELATED PARTIES

The Commission is an independent Crown entity under the Crown Entities Act 2004. The Commission is a wholly owned entity of the Crown and the government is its major source of revenue.

The Commission has entered into a number of transactions with other entities within the Crown on an arms length basis. Where those parties are acting in the course of their normal dealings with the Commission, related party disclosures have not been made for transactions of this nature.

During the year the Commission paid expenses to:

(a): Rodger Spiller & Associates, a firm of which R.M. Spiller, Member of the Commission, is the owner. The fees, totaling $15,522, charged on negotiated commercial terms, related to advice and contractual work carried out for the public education sub-project.
(b): Genesis Energy, a firm of which A.M. Cotton, Member of the Commission, is a director. The expenses totaling $45,260, related to office electricity charges which were charged on normal commercial terms.

These transactions are on normal commercial terms and there are no other material transactions between Members and the Commission in any capacity other than that to which they were appointed.

There were no amounts outstanding at year end relating to these transactions.

No related party debts have been written off or forgiven during the year.

NOTE 18 BUDGET VARIANCES

(a)
Income
Significant variances from budget were:

(i): additional interest income due to higher average interest rates;
(ii): reduced application fees for exemptions due to lower chargeable activity.

(b)
Expenditure
Significant variances from budget were:

(i): additional audit fees due to increase;
(ii): additional professional service costs due to greater public education activities;
(iii): reduced staff and recruitment costs due to vacancies;
(iv): additional travel and accommodation costs due to increased international activity arising from the Commission Chairman’s election as Chairman of IOSCO’s Executive Committee.

(c): Litigation Fund
Significant variances from budget were the additional litigation costs due to the Commission filing proceedings in the High Court relating to share trading in Tranz Rail Holdings Limited and Provenco Group Limited.

NOTE 19 INTERNATIONAL FINANCIAL REPORTING STANDARDS

(a)
Introduction
The Accounting Standards Review Board has issued replacement New Zealand Financial Reporting Standards to apply to periods beginning on or after 1 January 2007 but entities may choose to elect early adoption for up to 2 years earlier. The new standards are the New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS).

FRS-41 Disclosing the Impact of Adopting New Zealand Equivalents to IFRS requires that financial statements of issuers prior to implementation disclose:

(a): An explanation of how the transition to NZ FRIS is being managed;
(b): (i)a narrative explanation of the key differences in accounting policies that are expected to arise from adopting NZ IFRS; or; (ii) if the differences in (b)(i) above are not known, a statement to that effect
(c): (i) any known or reliably estimable information about the impacts on the financial report had it been prepared using NZ IFRS; or; (ii) if the impacts in (c)(i) above are not known or reliably estimable, a statement to that effect; and
(d): a cautionary note to the effect that the actual impact of adopting NZ IFRS may vary from the information presented, and that the variation may be material.

The Securities Commission is not an "issuer", however FRS-41 also encourages all other entities to make the above disclosures. The purpose of this note is to make these disclosures.

The Commission has previously expressed its intention to be an early adopter of IFRS, publishing its first full NZ IFRS financial statements for the year ending 30 June 2006.

(b): Management of the Transition to NZ IFRS
The Audit and Risk Review Committee is overseeing the transition to and implementation of the NZ IFRS on behalf of the Commission. The General Manager is formally responsible for the project and reports to the Audit and Risk Review Committee. Staff have undertaken an analysis of the main differences and impacts. This has been reviewed by an external advisor who has concurred with this analysis.

To comply with NZ IFRS for the first time, the Securities Commission will restate the comparative balances applying NZ IFRS. This requires a restatement of the opening balances as at 1 July 2004 to reflect any accounting policies required by the new standards.

(c): Major changes in accounting policy and their impacts
Changes in accounting policies under NZ IFRS are applied retrospectively i.e. as if the new policy had always applied, except as permitted in particular circumstances by NZ IFRS 1 First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards. An opening balance sheet prepared under NZ IFRS is required as at 1 July 2004. This will also enable the 2005/06 financial statements to report comparatives under NZ IFRS.

(d): Conclusion on Impacts
Although there are some ongoing discussions on a number of matters, at this stage it is the Commission's current assessment that NZ IFRS is unlikely to have a material impact on the 1 July 2004 opening balances, the 2004/05 financial performance, or the 30 June 2005 balances.

The actual impact of adopting NZ IFRS may vary from the information presented, and the variation may be material.

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