24 NOVEMBER 2006

NEW ZEALAND GAZETTE, No. 149

4309

TRANPOWER NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued
FOR THE YEAR ENDED 30 JUNE 2006

(f) 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 20.

(m) Reclassifications

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

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
New Zealand Generally Accepted Accounting Practice (NZ GAAP) under the Financial Reporting Act 1993 would be
required to apply New Zealand International Financial Reporting Standards (NZ 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 commenced a project assessing the impacts of changes in accounting
standards on Transpower and designing and implementing processes to deliver NZ IFRS compliant financial reporting as
well as dealing with any related business impacts.

Transition from existing NZ GAAP to NZ IFRS will be made in accordance with NZ IFRS 1 "First-time Adoption
of New Zealand Equivalents to International Financial Reporting Standards". Upon adoption of NZ IFRS, comparative
information will be restated to conform with the requirements of NZ IFRS and the impact that adoption of NZ IFRS
has had on Transpower’s financial statements will be set out.

The material areas of difference identified to date between existing NZ GAAP and NZ IFRS are detailed below. This
list is intended to be a summary of the potential significant impacts resulting from transition to NZ IFRS. The differences
below should not be taken as an exhaustive list of all significant differences between existing NZ GAAP and NZ IFRS.
We note the quantitative impact has yet to be calculated.

We note the NZ IFRS standards are subject to ongoing review by the Company and industry. Furthermore NZ IFRS,
and interpretations of NZ IFRS continue to be reviewed and new standards issued. As a result the effect of the actual
impact of adopting NZ IFRS may vary from the estimates indicated below, and the differences may be material.

Financial Instruments

Transpower economically hedges against the vast majority of its interest rate and currency risk using derivatives.
NZ IFRS requires derivative financial instruments to be recognised in the balance sheet at fair value. Transpower has
elected to also fair value its net debt portfolio. Subsequent to transition, changes in fair value of both the derivatives
and the net debt will flow through to the income statement. This will create some volatility in the income statement
as market prices change. Under existing NZ GAAP, financial instruments, including derivatives, are included at their fair
value in the notes to the financial statements. Material foreign purchases which are economically hedged will be accounted
for as hedges under NZ IAS 39 where possible. The changes in hedged terms will flow through the income statement but
will offset to the extent that they qualify for fair value hedges in accordance with NZ IAS 39.

Taxation

Transpower currently accounts for tax using the liability method applied on a partial basis. This means that deferred
tax is not recognised if the timing difference is not expected to reverse in the foreseeable future. This amount is disclosed
in the notes to the financial statements. NZ IFRS requires that all deferred tax be recognised in the balance sheet. Also,
the tax basis will change from the current "income statement" approach to a "balance sheet" approach. The net effect
of these changes will mean that Transpower will have to recognise its deferred tax liability in the balance sheet