2022/23 Financial statements

_{The accompanying notes form part of these financials. Explanations of major variances from budget are provided in note 17.}

_{The accompanying notes form part of these financial statements. Explanations of major variances from budget are provided in note 17.}

_{The accompanying notes form part of these financial statements. Explanations of major variances from budget are provided in note 17.}

_{The accompanying notes form part of these financial statements. Explanations of major variances from budget are provided in note 17.}

Reconciliation of net surplus/(deficit) to net cash flow from operating activities

_{The accompanying notes form part of these financial statements. Explanations of major variances from budget are provided in note 17.}

Reporting entity

The New Zealand Productivity Commission Te Kōmihana Whai Hua o Aotearoa (the Commission) is a Crown entity in terms of the Crown Entities Act 2004. It was established under the New Zealand Productivity Commission Act 2010 and its parent is the Crown. The Commission’s principal activities are to:

• undertake in-depth inquiries on topics referred to it by the Government
• carry out productivity-related research that helps improve productivity over time
• promote public understanding of productivity-related matters.

The Commission is a public benefit entity (PBE) for financial reporting purposes. The financial statements of the Commission are for the year ended 30 June 2023, and were approved by the Board on 31 October 2023.

Basis of preparation

The financial statements have been prepared on a going concern basis, and the accounting policies have been applied consistently throughout the period.

Statement of compliance

The financial statements have been prepared in accordance with the requirements of the Crown Entities Act 2004, which includes the requirement to comply with generally accepted accounting practice in New Zealand (NZ GAAP).

The Commission has applied the suite of Tier 2 Public Benefit Entity International Public Sector Accounting Standards (PBE IPSAS 1 RDR 28-3) in preparing the 30 June 2023 financial statements. The Commission has expenses of less than $30 million.

Measurement base

The financial statements have been prepared on a historical cost basis. Cost is the fair value of the consideration given in exchange for assets.

Functional and presentation currency

The financial statements are presented in New Zealand dollars and all values are rounded to the nearest thousand dollars ($000). The functional currency of the Commission is New Zealand Dollars.

Changes in accounting policies

The International Financial Reporting Interpretations Committee issued an agenda decision whereby a customer does not recognise an intangible asset from customisation and configuration of costs arising from software as a service arrangement if the supplier demonstrates control of the software. The new accounting policy is effective from 1 July 2021 and must be applied retrospectively.

There have not been any implementation costs capitalised from software as a service arrangement, therefore, this change in accounting policy does not have an impact on the Commission.

There have been no other changes in accounting policies during the financial year.

Comparatives

When the presentation or classification of items in the financial statements are amended or accounting policies are changed, comparative figures are restated to ensure consistency with the current period, unless it is impractical to do so.

New Standards adopted

PBE FRS 41 Financial Instruments

In March 2019, the External Reporting Board (XRB) issued PBE IPSAS 41 Financial Instruments, which supersedes both PBE IFRS 9 Financial Instruments and PBE IPSAS 29 Financial Instruments: Recognition and Measurement. The Commission has adopted PBE IPSAS 41 for the first time this year. There has been little change since adopting the new standard because the requirements are similar to those contained in PBE IFRS 9.

Significant accounting policies

The significant accounting policies that materially affect the measurement of financial performance, position and cash flows have been applied consistently for all reporting periods covered by these financial statements. The policies satisfy the concepts of relevance and reliability ensuring the substance of the underlying transactions of other events is reported. Significant accounting policies are included in the notes to which they relate.

Goods and services tax

All items in the financial statements are presented exclusive of goods and services tax (GST), except for receivables, which are presented on a GST-inclusive basis. Where GST is not recoverable as input tax, then it is recognised as part of the related asset or expense. The net GST recoverable from, or payable to Inland Revenue (IR) is included as part of receivables or payables in the Statement of Financial Position.

The net GST paid to, or received from IR, including the GST relating to investing and financing activities, is classified as a net operation cash flow in the Statement of Cash Flows.

Income tax

The Commission is a public authority and consequently is exempt from income tax under section CW 38 of the Income Tax Act 2007. Accordingly, no provision has been made for income tax.

Foreign currency transactions

Foreign currency transactions are translated into New Zealand dollars (the functional currency) using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the surplus or deficit.

Budget figures

The budget figures are derived from the Statement of Performance Expectations as approved by the Board. The budget figures are unaudited and have been prepared in accordance with NZ GAAP, using accounting policies that are consistent with those adopted by the Board in preparing these financial statements.

Performance outputs

Direct costs are charged directly to outputs. Research personnel costs are allocated to outputs based on the time spent. The indirect costs of support groups and overhead costs are charged to the outputs based on the proportion of direct costs of each output.

Critical accounting estimates and assumptions

In preparing these financial statements the Commission has made estimates and assumptions concerning the future. These estimates and assumptions may differ from the subsequent actual results. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Critical judgements in applying accounting principles

Management has exercised the following critical judgements in applying accounting policies:

Leases classification

Determining whether a lease agreement is a finance lease, or an operation lease requires judgement as to whether the agreement transfers substantially all the risks and rewards of ownership to the Commission. Judgement is required on various aspects that include, but are not limited to, the fair value of the leased asset, the economic life of the leased asset, whether to include renewal options in the lease term and determining an appropriate discount rate to calculate the present value of the minimum lease payments. Classification as a finance lease means the asset is recognised in the Statement of Financial Position as property, plant, and equipment, whereas for an operating lease no such asset is recognised. The Commission has exercised its judgement on the appropriate classification of equipment leases and has determined that none of the lease arrangements are finance leases.

Note 1 Revenue

Revenue is measured at a fair value of consideration received or receivable. Revenue is derived through the provision of outputs for the Crown, services to third parties and investment income.

Revenue from the Crown

Revenue from the Crown transactions are considered non-exchange transactions. The Commission is primarily funded through revenue received from the Crown. The funding is restricted in its use for the purpose of the Commission meeting its objectives as specified in its founding legislation and the scope of relevant government appropriations. Apart from these general restrictions, the Commission considers there are no conditions attached to the funding.

Revenue from the Crown is recognised as revenue when earned and is reported in the financial period to which it relates. The fair value of revenue from the Crown has been determined to be equivalent to the amounts due in the funding arrangements.

Interest

Interest revenue is recognised using the effective interest method.

Other revenue

Other revenue transactions are considered exchange transactions. They are personnel costs recovered for employees who work on secondment in other organisations.

Other revenue is recognised as revenue when earned and is reported in the financial period it relates to.

Note 2 Personnel costs

Personnel costs are recognised in the period they relate to.

Superannuation schemes

Defined contribution schemes

Obligations for contributions to KiwiSaver are accounted for as a defined contribution superannuation scheme and are recognised as an expense in the surplus or deficit as incurred.

Defined benefit schemes

The Commission does not make employer contributions to any defined benefit superannuation schemes.

Key personnel compensation

^{Key management personnel are Commissioners, Directors.}

Board fees

Commissioners are appointed by the Crown and are the Board for the purposes of the Crown Entities Act 2004. All Commissioners are part-time, and their fee is set by the Remuneration Authority.

During the financial year, payments made, or payable to Lesley Mackle, committee member appointed by the Board, but who is not a Board member, was $4,000 (2022: $4,000).

The Commission has not provided a deed of indemnity to Board members for activities undertaken in the performance of the Commission’s functions. The Commission has not affected Directors’ and Officers’ liability and professional indemnity insurance cover during the financial year in respect of the liability or costs of Board members and employees. No Board or committee members received compensation or other benefits in relation to cessation (2022: Nil).

Note 3 Other expenses

Office rental

The non-cancellable operating lease expense relates to the lease of level 15 of Fujitsu Tower in Wellington. The lease expires in March 2025. The Commission as a lessee exercised its right to renew in April 2016 with a rental rebate of $1,031.91 (GST exclusive) per month for 48 months from April 2021. A rental review was completed and applied from October 2021.

As the lessor retains substantially all the risk and rewards of ownership of the leased property, the operating lease payments are recognised in the surplus or deficit only in the period they occur in.

Any lease incentive received or obligations to make good on the condition of the leased premises are recognised in the surplus or deficit over the term of the lease.

The future aggregate minimum lease payments to be paid under non-cancellable operating leases are as follows:

Note 4 Cash and cash equivalents

Cash and cash equivalents include operating and savings bank accounts held with Westpac. The carrying value of cash at the bank and cash equivalents approximates fair value. The Commission is only permitted to spend its cash and cash equivalents within the scope and limits of its appropriation.

Note 5 Debtors and other receivables

Debtors and other receivables are initially measured at fair value and subsequently measured at amortised cost using the effective interest method. The carrying value of debtors and other receivables approximates their fair value.

All trade debtors are due within 30 days. Trade debtors have been assessed for impairment based on expected credit losses. No provision for expected credit losses have been made as at 30 June 2023 (2022: Nil).

Note 6 Property, plant and equipment

Property, plant, and equipment consists of the following asset classes: information technology equipment, furniture, office equipment, and leasehold improvements. The capitalisation thresholds are:

• Information technology equipment - $500 and over
• Furniture - No threshold
• Office equipment - $500 and over
• Leasehold improvements - No threshold

Additions

An item of property, plant and equipment is recognised as an asset only when it is probable that the future economic benefits or service potential associated with the item flow to the Commission beyond one year or more, and the cost of the item can be measured reliably. Property, plant, and equipment is recorded at historical cost less accumulated depreciation and any impairment loss. Depreciation on items of property, plant and equipment acquired in stages does not commence until the item of property, plant and equipment is in its final state and ready for its intended use. Subsequent expenditure that extends the useful life or enhances the service potential of an existing item of property, plant and equipment is capitalised. All other costs incurred in maintaining the useful life or service potential of an existing item of property, plant and equipment are recognised in the surplus or deficit as expenditure when incurred.

Disposals

Gains and losses arising from the sale or disposal of an item of property, plant and equipment are recognised in the surplus or deficit in the period in which the item of property, plant and equipment is sold or disposed of.

Depreciation

Depreciation is provided on a straight-line basis on all asset components to allocate the cost of the asset (less any estimated residual value) over its useful life. The residual values and remaining useful lives of property, plant and equipment are reviewed annually. This review includes a test of impairment to ensure the carrying amount remains recoverable.

Any impairment losses are recognised in the surplus or deficit. The estimated useful lives of the major asset classes are:

• Information technology equipment - 1 to 5 years
• Furniture - 3 to 10 years
• Office equipment - 5 to 10 years
• Leasehold improvements - 3 to 10 years

Leasehold improvements are depreciated over the unexpired period of the lease or the estimated remaining useful lives of the improvements, whichever is shorter. The residual value and useful life of an asset is reviewed, and adjusted if applicable, at each financial year end.

^{Property, plant and equipment have been assessed for impairment and no provisions for impairment have been made.}

Note 7 Intangible assets

Software acquisition

Computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Staff training costs are recognised as an expense when incurred. Costs associated with maintaining computer software are recognised as an expense when incurred. Assets are capitalised if the purchase price is $5,000 or greater.

Amortisation

The carrying value of an intangible asset with a finite life is amortised on a straight-line basis over its useful life. Amortisation begins when the asset is available for use and ceases at the date that the asset is derecognised. The amortisation charge for each financial year is recognised in the surplus or deficit. The Commission’s intangible assets are acquired software with useful life between 3 to 15 years.

Note 8 Creditors and other payables

Creditors and other payables are initially measured at fair value and subsequently measured at amortisation cost using the effective interest method. Creditors and other payables are non-interest bearing and are settled on commercial terms and conditions, normally 30 days or less. Therefore, the carrying value of creditors and other payables approximates their fair value.

Note 9 Lease incentive 

Any unamortised lease incentive received is recognised as a liability in the Statement of Financial Position.

Note 10 Employee entitlements

At the balance date, any unpaid employee entitlements earned by employees for salaries and annual leave are recognised as a liability in the Statement of Financial Position and recognised in the surplus or deficit. Entitlements are calculated on an actual entitlement basis at current rates of remuneration. The Commission recognises a liability and an expense for bonuses where it is contractually obliged to pay them, or where a past practice has created a constructive obligation. No provision has been made for sick leave as all sick leave is non-vesting and the average sick leave to be taken in future years by Commission employees is estimated to be less than the annual entitlement of sick leave.

The Commission does not offer retirement or long service leave benefits to its employees.

Note 11 Provisions

A provision is recognised for future expenditure of uncertain amount or timing when there is a present obligation (either legal or constructive) because of a past event, it is probable that expenditure will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

At the expiry of the lease term the Commission is required to make good any damage caused to its leased office premises, and to remove any fixtures or fittings installed by the Commission. The Commission has the option to renew this lease, which affects the timing of expected cash outflows to make-good the premises. The cash flows associated with provision are expected to occur in March 2025.

Information about the leasing arrangement is disclosed in note 3.

Movement within the provision:

Note 12 Equity

Equity is measured as the difference between total assets and total liabilities. Equity is disaggregated and classified into the following components:

• contributed capital
• accumulated surplus / (deficit)

The Commission is subject to the financial management and accountability provisions of the Crown Entities Act 2004, which impose restrictions in relation to borrowings, acquisition of securities, issuing guarantees and indemnities, and the use of derivatives. The Commission manages its equity as a by-product of prudently managing revenues, expenses, assets, liabilities, investments, and general financial dealings to ensure the Commission effectively achieves its objectives and purpose, while remaining a going concern.

Note 13 Contingencies 

The Commission has no contingent liabilities and no contingent assets as at 30 June 2023 (2022: Nil).

Note 14 Events after the balance date 

There were no significant events after balance date (2022: Nil).

Note 15 Financial instruments

Financial instrument risks

The Commission is a party to financial instrument arrangements as part of its everyday operations. These financial instruments include bank accounts, accounts receivable, and accounts payable. The Commission has policies to manage the risks associated with financial instruments. The Commission seeks to minimise exposure from financial instruments and does not enter into speculative financial instrument transactions.

Market risk

Interest rate risk

Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates.

Cash flow interest rate risk is the risk that cash flows from a financial instrument will fluctuate because of changes in market interest rates. The Commission’s exposure to cash flow interest rate risk is limited to on-call bank accounts and short-term deposits, arising from the investment of surplus cash due to the timing of cash inflows and outflows.

Credit risk

Credit risk is the risk that a third party will default on its obligation to the Commission, causing it to incur a loss. The Commission invests surplus cash with registered banks. In the normal course of business, the Commission is exposed to credit risk from cash and term deposits with banks, debtors, and other receivables. For each of these, the maximum credit exposure is best represented by the carrying amount in the Statement of Financial Position. Westpac Banking Corporation is the Commission’s main bank and has a S&P Global Ratings of AA-.

Liquidity risk

Management of liquidity risk

Liquidity risk is the risk that the Commission will encounter difficulty raising liquid funds to meet commitments as they fall due.

The Commission has a low exposure to liquidity risk as it does not enter into credit arrangements, except for those available from suppliers as part of normal operating agreements. The Commission manages liquidity risk by continuously monitoring forecast and actual cash flow requirements and aims to maintain sufficient funds in current and on-call bank accounts and short-term fixed deposits to meet forecast liquidity requirements.

Note 16 Related party transactions

The Commission is a wholly owned entity of the Crown. Related party disclosures have not been made for transactions with related parties that are within a normal supplier or client/recipient relationship on terms and conditions no more or less favourable than those that is reasonable to expect the Commission would have adopted in dealing with the party at arm’s length in the same circumstances. Further, transactions with other government agencies (for example, Government departments and Crown entities) are not disclosed as related party transactions when they are consistent with the normal operating arrangements between government agencies and undertaken on the normal terms and conditions for such transactions.

Key personnel

Commissioners are appointed by the Crown and are the Board for the purposes of the Crown Entities Act 2004. In addition to their role with the Commission, Commissioners have other interests and may serve in positions with other organisations, including organisations to which the Commission is related. Potential conflicts of interest are declared in an interests register.

No Commissioner was exempted during the year from the requirement to not vote or take part in any decision despite being interested.

Refer to note 2 for a breakdown of key management personnel compensation.

Note 17 Explanation of major variances against budget

The net deficit for the Commission from 1 July 2022 to 30 June 2023 was $479,000 (2021-22: net surplus of $963,000). In terms of the deficit of $479,000. The key area of overspend was $612,000 in professional services i.e., consultancy and contracting due to one-off expenditure for recruitment, strategic projects, and organisational development activity. This is partially offset with an underspend of $120,000 in personnel due to vacancies.

The planned overspend was forecasted and confirmed with Treasury in early 2023. No costs relating to this overspend were for on-going costs outside of this financial year.

Employee remuneration