Statement of Intent 2007-2010

Statement of Significant Assumptions

The assumptions used in preparing the forecast information were adopted by the Securities Commission on 21 June 2007 and are as follows:

Government grant
We assume a Government grant of $6,501,000 (excluding GST) for our operating activities. This is the amount appropriated to the Commission.

Administrative services to the Takeovers Panel
We have assumed recovery of $1,242,000 for services provided to the Takeovers Panel. This amount reflects an increase in the Panel's chargeable hours because of greater activity arising from its heightened enforcement powers and increased coverage of the Takeovers Code under the recently amended securities legislation. The hourly rate is unchanged at $115 per hour.

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 51 staff positions (44 full time equivalents).

Litigation expense and fund
We assume expenditure on approved litigation of $810,000. This is based on our most-likely litigation portfolio, arising from anticipated cases to be actioned, modeled 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 assume the settlement for costs on the Tranz Rail insider trading case of $2,200,000 (excl. GST).

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 2007/08
The 2006/07 estimate is based on management's judgments, estimates and assumptions of the final 2006/07 outcome and is used as the opening position for 2007/08 forecasts. Estimated year end information for 2006/07 is used as the opening position for the 2007/08 forecasts.

Possible changes to our operating environment and future capability
Some aspects of securities regulation are currently under review by Government. These include financial intermediaries, the wider law relating to financial products and providers, and anti-money laundering supervision. 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. The MED's review of financial products and providers is proposing reforms which would significantly increase the Commission's responsibilities. We have carried out a project to estimate the likely resource requirements of these new responsibilities and help us prepare for these changes, and advise the Government on the possible funding implications associated with any such reforms. This project has sought to quantify the likely funding needs for premises, infrastructure, technology and personnel needs. The financial implications of these possible changes have not been included in the forecast financial statements of this statement of intent.

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 the [21 June 2007].

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.

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). The Commission early adopted NZ IFRS on 1 July 2005.

Basis of preparation
The preparation of forecast financial statements in conformity with FRS-42 requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual financial results achieved for the period covered are likely to vary from the information presented, and the variations may be material.

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

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.

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.

Judgements and estimations
The preparation of financial statements in conformity with NZ IFRS requires 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. Subsequent actual results may differ from these estimates.

The 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 if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

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

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

Litigation
The Commission has settled the Tranz Rail insider trading case and expects to recover its costs totalling $2,200,000 (excl. GST).

Property, plant and equipment
Property, plant and equipment are shown at cost or deemed cost less depreciation and less any impairment losses (see Impairment page 27).

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.

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 financial performance.

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. 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.

Note 1 Other operating expenses