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2007 Annual Report

Notes to the Financial Statements
for the year ended 30 June 2007

NOTE 1    STATEMENT OF ACCOUNTING POLICIES

REPORTING ENTITY

The Securities Commission (the Commission) is a body corporate established by the Securities Act 1978. The financial statements of the Commission are prepared pursuant to section 154 of the Crown Entities Act 2004.

The Commission is an independent Crown entity for legislative purposes and a public benefit entity for the purposes of complying with Generally Accepted Accounting Practices in New Zealand (NZ GAAP).

The financial statements of the reporting entity, the Commission, for the year ended 30 June 2007 were authorised for issue by the Commission on 19 July 2007.

The Commission’s primary function is the regulation of investments in New Zealand.

BASIS OF PREPARATION

Statement of compliance
These financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (NZ GAAP). They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for public benefit entities.

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

Functional and presentational currency
These financial statements are presented in New Zealand dollars ($) which is the entity’s functional currency. All financial information presented in New Zealand dollars has been rounded to the nearest thousand dollars.

Use of estimates and judgements
The process of applying accounting policies requires the Commission to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on past experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

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 and in any future periods affected.

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

1. Impairment on library
   The Commission estimates there are no significant impairment issues in respect of the carrying values of its library collection.
2. 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 that the recovery of costs incurred in the filing of proceedings of this matter is disclosed as contingent asset under note 18.

SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies set out below have been applied consistently to all periods presented in these financial statements.

1. 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(o)).
   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.
2. 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.
3. Cash and cash equivalents
   Cash and cash equivalents comprise cash balances on hand, held in bank accounts and short term deposits that form part of the Commission’s day-to-day cash management. They are short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in values. They are held for the purpose of meeting short term cash commitments and have short maturities of three months or less.
4. 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.
5. Trade and other receivables
   Trade and other receivables and GST receivables are stated at cost less impairment losses.
6. 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.
7. 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.
8. GST
   All items in financial statements are exclusive of GST with the exception of trade and other receivables and trade and other payables 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.
9. Trade and other payables
   Trade and other payables and GST payable are stated at cost.
10. Financial instruments
    A financial instrument is recognised when the Commission becomes party to a financial contract. 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.
    Financial instruments comprise trade and other receivables, cash and cash equivalents, term deposits and trade and other payables.
11. Income tax
    The Commission is exempt from income tax under the Income Tax Act 1994.
12. Revenue recognition
    Government grant is recognised as revenue in the year in which it is appropriated.
    Revenue from application fees and recovery of related costs and revenue from administrative services provided to the Takeovers Panel is recognised when the relevant services are provided.
    Interest income is recognised as it accrues, based on the effective interest rate inherent in the respective financial instrument. 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.
13. 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.
14. Litigation fund Reimbursements from the Crown to top up the fund are shown as income in the period to which the Commission’s claim for reimbursement relates.
    The balance of the fund is disclosed as a component of equity in the statement of financial position. The fund is restricted for approved litigation purposes only.
15. 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. Trade and other receivables are individually assessed for impairment. This assessment is also made with reference to previous experience with debtors. 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.
16. 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.
17. Changes in accounting policy
    There have been no changes in accounting policies since the date of the last audited financial statements.