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2006 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 STATEMENT OF ACCOUNTING POLICIES

Reporting Entity

The financial statements of the Securities Commission for the year ended 30 June 2006 were authorised for issue by the Commission on 20 July 2006.

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 198 of the Crown Entities Act. The Commission is a Crown entity for legislative purposes and a public benefit entity for financial reporting purposes.

Basis of preparation

These financial statements have been prepared in accordance with New Zealand generally accepted accounting practice (NZ GAAP). They comply with New Zealand equivalents to IFRS (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for public benefit entities.

The accounting principles recognised as appropriate for the measurement and reporting of results and financial position on a historic cost basis have been applied.

These financial statements are presented in New Zealand dollars rounded to the nearest dollar.

These are the Commission’s first financial statements complying with NZ IFRS and NZ IFRS 1 has been applied. On 1 July 2005 the Securities Commission adopted NZ equivalents to IFRS for the first time. This required retrospective application of all NZ IFRS to comparative information. The impact of adoption of NZ IFRS is outlined in the accounting policies below.

Accounting policies

The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in preparing an opening NZ IFRS statement of financial position as at 1 July 2004 for the purpose of transition to NZ IFRS.

Judgements and estimations

The preparation of financial statements in conformity with NZ IFRS requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Subsequent actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 2.
Property, plant and equipment

Property, plant and equipment are shown at cost or deemed cost less depreciation and less any impairment losses (see note 1(n)).

Library collections that had been revalued to fair value immediately prior to 1 July 2004, the date of transition to IFRSs, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation. The following classes of property, plant and equipment have been depreciated over their economic lives 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,
- library collections - straight line over ten years,
- motor vehicle - straight line over five years.
Intangible assets

Computer software that is not integral to the operation of the hardware is recorded as an intangible asset and amortised on a straight line basis over a period of three years.
Cash and cash equivalents

Cash and cash equivalents means cash balances on hand, held in bank accounts in which the Commission invests as part of its day-to-day cash management. This includes short term deposits held by the Commission that have maturities less than or equal to three months.
Term deposits

This category only includes term deposits with maturities greater than three months. These deposits are loans and receivables under NZ IFRS. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method.
Short term employee benefits

Employee entitlements represent the Commission’s liability for employee annual leave entitlements. This has been calculated on an accrued entitlement basis which involves recognising the undiscounted amount of short term employee benefits expected to be paid in exchange for service that an employee has already rendered. This is calculated at current remuneration rates.
Operating leases

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straightline basis over the lease term after taking into account any lease inducements.
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.

The statement of cash flows has been prepared on a net GST basis. That is, cash receipts and payments are presented exclusive of GST. A net GST presentation has been chosen to be consistent with the presentation of the statement of financial performance and statement of financial position. The net GST component of operating activities reflects the net GST paid to and received from the Inland Revenue Department. The GST component has been presented on a net basis as the gross amounts would not provide meaningful information for financial statement purposes.
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.
Income tax

The Commission is exempt from income tax under the Income Tax Act 2004.
Revenue recognition

Government grant is recognised as revenue in the year in which it is appropriated. Revenue from application fees and costs recoverable and from administrative services to the Takeovers Panel is recognised when the relevant services are provided.

Interest income is accrued using the effective interest rate method. The effective interest rate exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. The method applies this rate to the principal outstanding to determine interest income each period.
Cost allocation policy

For the purposes of the statement of service performance direct costs are charged directly to outputs. Indirect costs are allocated on the basis of direct labour hours spent on each output.
Litigation fund

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.
Impairment

The Commission considers at each reporting date whether there is any indication that a non-financial asset may be impaired. If any such indication exists, the asset’s recoverable amount is estimated. Given that the future economic benefits of the Commission’s assets are not directly related to the ability to generate net cash flows the value in use of these assets is measured on the basis of depreciated replacement cost.

At each balance date financial assets such as receivables are assessed for impairment. The recoverable amount is the present value of the estimated future cash flows.

An impairment loss is recognised in the statement of financial performance whenever the carrying amount of an asset exceeds its recoverable amount. Any reversal of impairment losses is also recognised in the income statement.
Contingent assets and contingent liabilities

Contingent liabilities are disclosed if the possibility that they will crystallise is not remote. Contingent assets are disclosed if it is probable that the benefits will be realised.
Changes in accounting policy

There have been no changes in accounting policies since the date of the last audited financial statements prepared under NZ GAAP, other than the impact of adoption of NZ IFRS (see note 1(q)).
Impact of adoption of NZ IFRS

On 1 July 2005 the Commission adopted NZ equivalents to IFRS for the first time. This requires retrospective application of all NZ IFRSs to comparative information. Because there is no material change in equity or profit between previous NZ GAAP and NZ IFRS no reconciliation of previous NZ GAAP to NZ IFRS figures is required.

The changes arising from the adoption of NZ IFRS are as follows:

Statement of financial performance

Other than presentational changes, the change to NZ IFRS has not impacted the statement of financial performance.

Statement of financial position

Previously library collections were revalued regularly. The Commission has decided for cost/benefit reasons to change to an accounting policy of recording these collections at cost. The Commission has elected under NZ IFRS 1 to use a previous GAAP revaluation of library collections as deemed cost at the date of transition. This is the only option that the Commission has elected to take under NZ IFRS 1. This change in accounting policy does not affect total equity but simply involves the transfer of the revaluation reserve to accumulated funds of $44,330. The aggregate of the fair value of the library collections viewed as deemed cost as at 1 July 2004 was $155,754.

Software that is not integral to the running of computer hardware has been reclassified as a separate intangible. The amount of property, plant and equipment reclassified as software was $28,912 at 1 July 2004 and at 30 June 2005 was $29,845.

As part of the change to NZ IFRS the Commission now reflects term deposits with maturities less than or equal to three months as part of cash and cash equivalents. Term deposits with maturities greater than three months are classified on their own. Previously all term deposits regardless of their maturity were classified a part of short term deposits. The aggregate of term deposits reclassified as cash and cash equivalents at 1 July 2004 was $500,000 and $763,876 for the litigation fund. The aggregate of term deposits reclassified as cash and cash equivalents at 30 June 2005 was $100,000 and $325,716 for the litigation fund.

Statement of cash flows

As part of the change to NZ IFRS, the statement of cash flows for the year ended 30 June 2005 presents the increase and decrease in term deposits on a gross rather than a net basis and short term deposits are now included as part of cash and cash equivalents.

This change and the reclassification of term deposits to cash and cash equivalents have impacted on the statement of cash flows for the year ended 30 June 2005 as follows:

the net increase in term deposits of $100,000 has changed to a net increase in term deposits of $500,000; and

the net decrease in term deposits for litigation fund of $438,110 now becomes nil.

NOTE 2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The Commission has made the following critical accounting estimates and judgements when preparing these financial statements.

Impairment on library

The Commission estimates there are no significant impairment issues in respect of the carrying values of its library collection.

Litigation

The Commission has filed proceedings in the High Court in an insider trading case. The Commission has relied on advice from legal counsel in forming a view on contingent assets, as per note 17.

NOTE 3 BUDGET FIGURES

The budget figures are those approved by Commission Members on 22 September 2005. 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.

NOTE 4 INCOME AND EXPENSE

2006 Budget $		Note	2006 Actual $	2005 Actual $


	Other income
-	Gain on disposal of fixed assets		1,800	7,658
-	Miscellaneous income		11,187	-

-			12,987	7,658


	Personnel expenses
3,604,560	Staff expenses		3,242,719	3,013,217
688,787	Members’ fees	18	650,144	643,835

4,293,347			3,892,863	3,657,052


	Depreciation and amortisation
404,863	Depreciation	11	406,149	389,692
29,506	Amortisation	12	22,784	20,992

434,369			428,933	410,684


	Other operating expenses
12,000	Auditors – audit fees		12,600	12,000
-	Auditors – fees for transition to NZ IFRS		10,000	-
-	Auditors – assurance and related services		960	1,200
-	Bad debts		-	3,797
65,000	Communication charges		58,205	50,163
-	Litigation		-	1,850
315,000	Printing and stationery		328,568	321,953
639,000	Professional services		370,654	566,536
770,500	Services and supplies		577,929	603,531
342,000	Travel and accommodation		396,818	333,172

2,143,500			1,755,734	1,894,202

Audit New Zealand carried out an assurance related assignment for the Commission relating to the financial delegations policy. This was compatible with the independence requirements of the Auditor-General which incorporated the independence requirements of the New Zealand Institute of Chartered Accountants. No other non-audit work was undertaken by Audit New Zealand for the Commission.

NOTE 5 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 6 RENT HOLIDAY LIABILITY

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 7 LITIGATION FUND

The Government has agreed to fund a litigation fund of $843,750 and to make top-ups as necessary to maintain the fund. It represents government funding to cover the costs incurred by the Securities Commission in taking or defending eligible cases. The fund is restricted for this purpose only.

		2006 $	2005 $


Opening balance		843,750	843,750

Government grant revenue		458,913	1,692,368
	Interest	37,435	29,636
	Other income	288,662	2,136

Litigation income		785,010	1,724,140
Expenditure on eligible litigation		(785,010)	(1,724,140)

Closing balance		843,750	843,750


Comprising
Cash and cash equivalents
-	Current account	69,163	517,058
-	Short term deposits	549,674	325,716

		618,837	842,774
Trade and other receivables		279,427	308,045

		898,264	1,150,819
Trade and other payables		(54,514)	(307,069)

		843,750	843,750

NOTE 8 MANAGEMENT OF EQUITY

The Commission seeks to maintain sufficient equity to enable it to be able to manage its on-going operations and obligations. Surplus funds are invested having regard to the cash flow profile of future commitments. The Commission is not subject to any externally imposed equity requirements.

NOTE 9 RECONCILIATION OF THE NET SURPLUS FROM OPERATIONS WITH THE NET CASH FLOWS FROM OPERATING ACTIVITIES

		2006 $	2005 $


Reported surplus (deficit)		410,883	21,712


Add (less) non-cash items:
-	Allocation of receipt of rent free period	(12,992)	(12,992)
-	Depreciation/amortisation	428,933	410,684

		415,941	397,692


Add (less) movement in working capital:
-	Increase (decrease) in creditors	(142,346)	304,569
-	Decrease (increase) in receivables	38,032	(153,666)

		(104,314)	150,903

Add (less) investing activity items:
-	Gain on sale of assets	(1,800)	(7,658)

		(1,800)	(7,658)

Net cash flows from operating activities		720,710	562,649

NOTE 10 TRADE AND OTHER RECEIVABLES

	2006 $	2005 $


Trade receivables	68,804	51,204
Receivables from the Crown	251,848	307,069
Interest receivable	6,422	6,839

	327,074	365,112

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