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Statement of Intent 2009-2012

Statement of Significant Assumptions

The assumptions used in preparing the forecast information were adopted by the Securities Commission on 14 May 2009 and are as follows:

Government grant

We assume a Government grant of $9,121,000 (excl GST) for our operating activities and $600,000 (excl GST) for capital expenditure as appropriated to the Commission. Litigation fund appropriations are $1,370,000 (excl GST).

Administrative services to the Takeovers Panel

We have assumed a recovery of $96,000 for services provided to the Takeovers Panel (Panel). We expect co-location arrangements with the Panel will conclude by October 2009. We budget that the Panel will physically separate to its new offices by October 2009.

Exemptions and authorisations income

We have assumed that our total income from fees and the recovery of costs under the Regulations will be $250,000. We have based this on our historical experience and expect the general historical pattern to apply.

Personnel expenses

We expect 57 staff positions (45.6 full time equivalents).

Litigation expense and fund

We assume expenditure on approved litigation of $843,750. This is based on our most-likely litigation portfolio, arising from anticipated cases to be actioned, modelled on our historical experience. We note the volatility inherent in predicting litigation activity. Actual litigation activity and expenditure may be materially different from forecast.

We estimate a repayment to the Crown of $2,065,317 (GST exempt) being the amount received for recovery of costs following the settlement of the Tranz Rail insider trading case.

Occupancy and other operating costs

We have based our occupancy and other operating costs on our historical experience. We expect the general historical pattern to continue.

Opening position for 2008/09

The 2008/09 estimate is based on management's judgements, estimates and assumptions of the final 2008/09 outcome and is used as the opening position for 2009/10 forecasts. Estimated year end information for 2008/09 is used as the opening position for the 2009/10 forecasts.

Possible changes to our operating environment and future capability

Several aspects of securities regulation are currently under review by the Government. These include:

the reforms arising from the Capital Markets Development Taskforce recommendations
anti-money laundering supervision and
the broader review of Securities Act.

It is likely that reforms arising from these reviews will affect the Commission within the period of this statement of intent. In particular, if the Commission is given new functions it will need additional resources. We continue to carry out projects to advise the Government on the resource and funding implications associated with the proposed reforms. These projects have sought to quantify the likely funding needs for premises, infrastructure, technology and personnel. The financial implications of the proposed reforms have not been included in the forecast financial statements of this statement of intent.

New law to regulate financial advisers, the Financial Advisers Act (FAA), was passed on 28 September 2008 making the Commission the main regulator of advisers. We continue to carry out estimation projects to identify the likely resource and funding requirements for implementing the FAA beyond 2009/10. The projects seek to quantify the funding and resource (people, technology, infrastructure and personnel) needs. These financial statements reflect the financial implications of the FAA implementation work during 2009/10. All financial implications of FAA implementation beyond 2009/10 are expected to be quantified as part of the estimation projects and have not been included in the forecast financial statements of this statement of intent.

Deficit funding

After several years of building reserves, the Commission is forecasting deficits for 2008/09 and 2009/10 to fund greater work on its existing class of outputs. The deficits will fund greater operational workloads arising mainly from financial reporting, increasing complexity of matters, international recognition and risk management. The Ministry had engaged the services of KPMG to undertake a funding and fees review of the Commission. The final report has been presented by KPMG to the Minister. It supports extra funding for the Commission's existing functions arising from the increasing operational and organisational workloads. The financial implications arising from the KPMG recommendations have not been included in these financial statements.

Statement of Significant Accounting Policies

Reporting entity

The forecast financial statements presented here for the reporting entity, the Securities Commission, are prepared pursuant to section 142 of the Crown Entities Act 2004. The Commission is a Crown entity for legislative purposes and a public benefit entity for financial reporting purposes.

These forecast financial statements were authorised for issue by the Commission on 19 June 2008.

These forecast financial statements have been prepared for the special purpose of the 2007/08 statement of intent of the Securities Commission to the Minister of Commerce. They are not prepared for any other purpose and should not be relied upon for any other purpose.

These forecast financial statements have not been reviewed or audited by our auditors, Audit New Zealand.

Basis of preparation

Statement of compliance

These forecast financial statements comprise prospective financial information and have been prepared in accordance with New Zealand Financial Reporting Standard No. 42: Prospective Financial Statements (FRS-42). These forecast financial statements are prepared under New Zealand equivalents of International Financial Reporting Standards (NZ IFRS).

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 has been rounded to the nearest thousand.

Use of estimates and judgements

The preparation of forecast financial statements in conformity with FRS-42 requires management to make 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. Actual financial results achieved for the period covered are likely to vary from the information presented, and the variations may be material.

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

Litigation fund
The Commission estimates a repayment to the Crown of $2,065,317 (GST exempt), being the amount received from the settlement of the Tranz Rail insider trading case for recovery of costs.

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

Accounting policies

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

Forecast and estimate figures
The forecast and estimate 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 financial statements. The Commission is responsible for the financial statements presented, including the appropriateness of the assumptions underlying the financial statements and all other required disclosure. It is not intended to update these financial statements subsequent to publication of these statements.

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

Library collections that were revalued to fair value immediately prior to 1 July 2004, the date of transition to IFRS, 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 comprise cash balances on hand and held in bank accounts in which the Commission invests as part of its day-to-day cash management. This includes any 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.

Superannuation schemes
Obligations for employer contributions to the KiwiSaver scheme are accounted for as defined contribution schemes and are recognised as an expense in the statement of financial performance as incurred.

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 straight line 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 comprehensive income.

Income tax
The Commission is exempt from income tax under the Income Tax Act 1994.

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 forecast 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. 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 income statement whenever the carrying amount of an asset exceeds its recoverable amount. Any reversal of impairment losses is also recognised in the income statement.

Changes in accounting policy
There have been no changes in accounting policies since the date of the last audited financial statements prepared under NZ IFRS.

However, as required by NZ FRS, the statement of financial performance is now called statement of comprehensive income.

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