4586 NEW ZEALAND GAZETTE No. 174

ELECTRICITY CORPORATION OF NEW ZEALAND LIMITED

STATEMENT OF ACCOUNTING POLICIES

Research and Development

Costs incurred on all research and development projects are written off as incurred, except that when a project reaches the stage where such expenditure is considered capable of being recouped through development or sale, all subsequent expenditures are capitalised.

Capitalised costs are amortised on a straight line basis over the period of the expected benefits.

Financial Instruments

ECNZ has various financial instruments with off-balance sheet risk for the purpose of reducing its exposure to movements in interest rates and foreign exchange rates. While these financial instruments are subject to risk that market rates may change subsequent to acquisition, such changes would generally be offset by opposite effects on the items being hedged.

For interest rate swap agreements the differential to be paid or received is accrued and is recognised as a component of interest expense or interest income over the life of the swap agreement.

Premiums paid on interest rate options and the net settlement on maturity of forward rate agreements, futures and options are amortised over the period of the underlying asset or liability protected by the instrument.

Forward exchange contracts entered into as a hedge for foreign currency transactions (other than offshore funding activities) are revalued at balance date.

Financial instruments entered into with no corresponding underlying position are accounted for on a mark to market basis and gains or losses taken to the statement of financial performance as they accrue.

Distinction between Capital and Revenue Expenditure

Capital expenditure is defined as all expenditure on the creation of a new asset, and any expenditure which results in a significant improvement to the original function of an existing asset.

Revenue expenditure is defined as expenditure which restores an asset to its original operating capabilities and all expenditure incurred in maintaining and operating the business.

Employee Entitlements

Provision has been made for annual, long service and retirement leave entitlements estimated to be payable to employees, on the basis of statutory and contractual requirements.

Insurance

ECNZ’s fixed assets are predominantly concentrated at power station locations which have the potential to sustain major losses through damage to plant and resultant consequential costs.

To minimise the financial impact of such exposures, the assessed risk is transferred to insurance companies by taking out appropriate policies.

Any uninsured loss is charged to the statement of financial performance in the year in which the loss is incurred.

Changes in Accounting Policies

There have been no changes in accounting policies during the year ending 30 June 1996. All accounting policies have been applied on bases consistent with those used in the previous year.

Comparative Figures

The comparative figures for the year ended 30 June 1995 have been restated to show:

• as discontinued activities the revenue and expenses for that year of the eight power stations that were sold to Contact Energy Limited (Contact) at book value on 1 February 1996;

• the elimination of two subsidiaries, namely Rutherford House Limited and ECNZ Insurance Limited as this provides a more accurate basis for disclosure under the Electricity Information (Disclosure) Regulations 1994.