Notes to the Financial Statements

NOTE 1: Other Revenue

NOTE 2: Personnel Costs

NOTE 3: Operating Costs

Contract Management represents contracts with Chubb New Zealand Limited and the New Zealand Prisoners' Aid and Rehabilitation Society Incorporated.

Contract Management costs have reduced this financial year due to the Department taking over the running of the Auckland Regional Remand Prison from GEO Group Australia Pty Ltd.

* The amount reported to Treasury was $175,815.

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 2006 was 8.0 percent per annum (2005: 8.0 percent).

NOTE 6: Other Expenses

The prior year actual represents the portion of the 30 June 2005 building revaluation which reverses the revaluation deficit of 30 June 2002.

NOTE 7: Taxpayers' 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 valuation of forests was undertaken by an independent registered valuer, P F Olsen and Company Limited, on 30 June 2006. This valuation was completed by T Vos, registered forestry consultant, NZIF.

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

NOTE 11: Creditors and Payables

NOTE 12: Provisions

Provisions include an employee provision for the estimated cost of future work-related accident claims and 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 revalues the Department's non-current liabilities on a quarterly basis.

The major assumptions used in the 30 June 2006 valuation is that salary growth rates are 3.0% per annum and discount rates ranged from 5.77% to 6.54% per annum.

NOTE 15: Reconciliation of Net Surplus to Net Cash Flow from Operation Activities for the Year Ended 30 June 2006

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 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 2006 (30 June 2005: 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

Opening Taxpayer's Funds and Taxpayer Revaluation Reserves are higher due to the timing issues for the preparation of the 2005/06 Main Estimates. The 2004/05 revaluation of land and buildings was not originally included in the 2005/06 Main Estimates due to the timing of the preparation of the Main Estimates.

Capital contributions, cash and bank balances and general taxpayer's funds are lower than the Main Estimates due to the Department not taking up $75 million in capital appropriation in 2005/06. The Department did not require this capital funding due to delays in the commencement of the Department's infrastructure work at existing sites. The Department applied for an in-principle capital transfer so that this $75 million in funding has been transferred to the 2006/07 financial year when expenditure is to occur.

The increase in physical assets compared to the Main Estimates is due to additional investment in the Department's capital investment programme to add existing prisoner accommodation capacity. Additional work and cost escalations on the Otago Region Corrections Facility (ORCF) and Spring Hill Corrections Facility (SHCF) increased after the preparation of the Main Estimates. The Department self-funded a portion of these capital projects, out of cash generated from the depreciation funding.

Creditors and payables are significantly higher than the Main Estimates due to the increased capital works. This is primarily due to timing issues arising from when payments were made at the end of the financial year.

The Department's $4.830 million forestry revaluation expense is coded to the Prisoner Employment output class. Section 4 (2a) of the Public Finance Act states that the remeasurement of an asset or liability is not an expense under this section. The forestry revaluation loss recorded at 30 June 2006 represents the valuer's outlook for; logging plan, prices, costs, discount rates, and treatment of land cost.

NOTE 20: Post-balance Date Events

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