NEW ZEALAND GAZETTE

No. 170

Electricity Corporation of New Zealand Limited

Notes to the Financial Statements

Taxation

The taxation charge against the profit for the year is the estimated liability in respect of that profit, after allowance for permanent differences.

Deferred taxation resulting from timing differences is adjusted against profit for the year using the liability method and is accounted for on a comprehensive basis.

Future taxation benefits attributable to timing differences or losses carried forward are recognised in the financial statements only where there is virtual certainty that the benefit of the timing differences or losses will be utilised by ECNZ.

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 and currency 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. Any unrealised gains or losses are offset against foreign exchange gains or losses on the related asset or liability.

Off balance sheet 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.

Statement of cash flows

The following are the definitions of the terms used in the statement of cash flows:

a) Cash is considered to be cash on hand and bank current accounts, net of bank overdrafts;

b) Investing activities are those activities relating to the acquisition, holding and disposal of fixed assets and of investments. Investments can include securities not falling within the definition of cash;

c) Financing activities are those activities which result in changes in the size and composition of the capital structure of ECNZ. This includes both equity and debt not falling within the definition of cash. Dividends paid in relation to capital structure are included in financing activities;

d) Operating activities include all transactions and other events that are not investing or financing activities.

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.