4000 No. 167

NEW ZEALAND GAZETTE

Electricity Corporation of New Zealand Limited

Notes to the Financial Statements

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 are 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 fixed asset, and any expenditure which results in a significant improvement to the original function of an existing fixed asset.

Revenue expenditure is defined as expenditure which restores a fixed 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.

Resource consents

Costs incurred in obtaining a resource consent are capitalised and recognised as a term asset. These costs are amortised over the life of the consent on a straight-line basis.

Comparative figures

Prior year comparative figures are restated where they are inconsistent with the current year classifications.

Changes in accounting policies

During the year ECNZ changed its accounting policy in respect of resource consents. Due to the significant amounts concerned and the duration of the consents, costs incurred in obtaining a resource consent are now capitalised and recognised as a term asset. These costs are amortised over the life of the consent on a straight-line basis. Previously these costs were included in the statement of financial performance when incurred.

The financial effect of this change in accounting policy is not material to the financial statements of prior periods and is recognised in note 8.

There have been no other changes in accounting policies applied during the year, and all other accounting policies have been applied on bases consistent with those applied in ECNZ’s annual report for the previous year.