Notes to the Financial Statements

NOTE 1: Other Revenue

NOTE 2: Personnel Costs

Retirement and long service leave for 2004/05 has decreased due to a change in the discount rates used. This change occurred during the annual revaluation of employee entitlements performed by Aon New Zealand.

NOTE 3: Operating Costs

Contract Management represents contracts with GEO New Zealand Pty Limited, Chubb New Zealand Limited and the New Zealand Prisoners’ Aid and Rehabilitation Society Incorporated.

The Department has reclassified some of its administration costs to facilities maintenance, offender management and other operating costs to more accurately reflect the nature of why these costs were incurred. The 2003/04 comparatives have been re-aligned accordingly.

NOTE 4: Depreciation

NOTE 5: Capital Charge

The Department pays a capital charge to the Crown on its taxpayers’ funds as at 30 June and 31 December each year.

The capital charge rate for the year ended 30 June 2005 was 8.0 percent per annum (2004: 8.5 percent).

NOTE 6: Other Expenses

This represents the portion of the 30 June 2005 revaluation which reverses the revaluation deficit of 30 June 2002.

The effect of the forestry revaluation as at 30 June 2005 is reflected in Note 3: Operating Costs.

NOTE 7: Taxpaters' Funds

Taxpayers’ Funds comprises two components:

General Funds

Revaluation Reserve

NOTE 8: Debtors and Receivables

NOTE 9: Investments

The increase in investments is primarily due to the issue of shares by the Fonterra Co-operative Group Ltd to Corrections Inmate Employment in lieu of dividends. In order to continue business with the Fonterra Co-operative Group Ltd, Corrections Inmate Employment must hold shares given to it by that group.

NOTE 10: Physical Assets

Freehold land and buildings were valued at fair value as at 30 June 2005 by an independent registered valuer, valuersnet.NZ. This valuation was completed by M W Lauchlan ANZIV SNZPI.

The annual valuation of forests was undertaken by an independent registered valuer, P F Olsen and Company Limited, on 30 June 2005. This valuation was completed by T Vos, registered forestry consultant, New Zealand Institute of Forestry.

The land holdings of the Department are subject to general Treaty of Waitangi claims. No reduction in value has been recognised in these financial statements but there may be restrictions on the Department disposing of the holdings except under Treaty claims procedures.

NOTE 11: Creditors and Payables

NOTE 12: Provisions

Provisions include an employee provision for the estimated cost of future work-related accident claims, ACC residual levies for ongoing entitlement costs for claims prior to 30 June 1999 and a restructuring provision.

NOTE 13: Provision for Repayment of Surplus to the Crown

NOTE 14: Provision for Employee Entitlements

Aon New Zealand revalued the non-current retiring leave portion of employee entitlements as at 31 August 2004. The Department applied the new rates from this revaluation to the non-current long service leave portion of employee entitlements.

The major assumptions used in this review are that salary growth rates are 3.0 percent per annum, and discount rates ranged from 6.18 percent to 6.21 percent per annum.

NOTE 15: Reconciliation of Net Surplus to Net Cash Flow from Operation Activities for the Year Ended 30 June 2005

NOTE 16: Financial Instruments

The Department is party to financial instrument arrangements as part of its everyday operations. These include instruments such as bank balances, investments, accounts receivable and trade creditors.

Cash
The Department did not enter into any forward exchange contracts during the financial year.

Credit Risk
Credit risk is the risk that a third party will default on its obligations to the Department, causing the Department to incur a loss. In the normal course of business, the Department incurs credit risk from trade debtors, and transactions with financial institutions.

The Department does not require any collateral or security to support financial instruments with financial institutions that the Department deals with, as these entities have high credit ratings. For its other financial instruments, the Department does not have significant concentrations of credit risk.

Fair Value
The fair value of all financial instruments is equivalent to the carrying amount disclosed in the Statement of Financial Position.

Currency Risk
Currency risk is the risk that debtors and creditors due in foreign currency will fluctuate because of changes in foreign exchange rates.

Interest Rate Risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. This could impact on the return on investments or the cost of borrowing. The Department has no significant exposure to interest rate risk on its financial instruments.

Under section 46 of the Public Finance Act 1989, the Department cannot raise a loan without Ministerial approval and no such loans have been raised. Accordingly, there is no interest rate exposure for funds borrowed.

NOTE 17: Contingencies

The Department does not have any contingent assets as at 30 June 2005 (30 June 2004: nil).

Contingent liabilities are separately disclosed in the Statement of Contingent Liabilities.

NOTE 18: Related Party Information

The Department is a wholly owned entity of the Crown. The Government significantly influences the roles of the Department as well as being its major source of revenue.

The Department enters into numerous transactions with other government departments, Crown agencies and state-owned enterprises on an ‘arm’s length’ basis. Where those parties are acting in the course of their normal dealings with the Department, related party disclosures have not been made for transactions of this nature.

Apart from those transactions described above, the Department has not entered into any related party transactions.

NOTE 19: Major Budget Variations

Statement of Financial Performance, Statement of Financial Position, Statement of Cash Flows and Statement of Departmental Expenditure and Appropriations

Revenue Crown, operating and personnel costs are less than projected in the Supplementary Estimates process due to actual prisoner numbers being less than forecast. In addition, the Department also had recruitment difficulties in 2004/05 that impacted on the amount of training provided and associated staff costs.

General funds, physical assets and net cash flows from financing activities is more than projected in the Main Estimates process due to additional capital being appropriated to construct 493 beds on existing sites.

Physical assets and revaluation reserves are more than projected in the Main Estimates process due to an increase in the value of land, buildings and forests.

The increase in cash is offset by the increase in Creditors and Payables. This is primarily due to timing issues arising from when payments were made at the end of the financial year.

The Inmate Employment output class is $9.7 million under appropriation of which $5.3 million is due to forestry revaluation as at 30 June 2005 and the remainder is due to higher cost offsets as a result of higher than expected internal sales.

NOTE 20: Post-balance Date Events

There were no post-balance date events that required adjustment to the financial statements.