30 NOVEMBER 2005
NEW ZEALAND GAZETTE, No. 200
5063

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued
FOR THE YEAR ENDED 30 JUNE 2005

(l) Financial Instruments

Derivative financial instruments including foreign exchange contracts, forward rate agreements, foreign exchange options, cross currency interest rate swaps, interest rate swaps and interest rate options which are entered into for the purpose of reducing exposure to fluctuations in interest rates and foreign exchange rates. While these financial instruments are subject to the risk that market rates will change subsequent to acquisition, such changes would generally be offset by an opposite effect on the items being hedged.

For interest rate swaps, the differential to be paid or received is accrued as interest rates change and is recognised as a component of interest and expensed over the life of the swap. Premiums paid on interest rate options are amortised over the period to maturity. The settlement cash flows on the maturity of forward rate agreements are amortised over the period of the underlying asset or liability that the financial instrument is hedging.

Foreign exchange contracts and cross currency interest rate swaps entered into as hedges of foreign currency assets and liabilities are valued at exchange rates prevailing at balance date. Any unrealised gains and losses are offset against foreign currency gains or losses on the related asset or liability.

Additional information about financial instruments to which the Transpower Lines Business is a party is provided in Note 21.

(m) Reclassifications

Certain reclassifications of prior year balances have been made to conform with current year classifications.

In the current year the Lines Business has recorded a funding arrangement entered into in 2002 on a gross basis rather than the net basis presented in prior years, refer Note 12 for further details.

Changes in Accounting Policies

There has been no change in accounting policies during the year.

The Impacts of Adopting New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS)

In December 2002 the Accounting Standards Review Board announced that New Zealand entities required to comply with NZ Generally Accepted Accounting Practice under the Financial Reporting Act 1993 would be required to apply IFRS. The new standards are able to be applied for periods beginning on or after 1 January 2005. Mandatory application of the new standards is required for periods beginning on or after 1 January 2007.

Transpower has elected to adopt NZ IFRS for the financial year beginning 1 July 2007 with comparatives required to be restated on initial adoption.

Transpower has established a project, monitored by a steering committee to achieve transition to NZ IFRS reporting. The implementation project consists of three phases:

(i) Assessment and Planning
The assessment and planning phase aims to produce a high level overview on the impacts of conversion to NZ IFRS with respect to existing accounting and reporting policies, procedures, systems and processes, business structures and staff.

(ii) Design Phase
The design phase aims to formulate the changes identified from the assessment and planning phase, specifically:

• Formulating revised accounting policies and procedures
• Formulating revised accounting and business processes
• Developing NZ IFRS disclosures
• Identifying and planning required changes to financial reporting and business source systems
• Developing training programs for staff

(iii) Implementation Phase
The implementation phase aims to implement the changes identified in the design phase.

Transpower is currently in the Assessment and Planning phase. Initial significant impacts are currently being identified. No reliable estimates are available yet.