TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued

FOR THE YEAR ENDED 30 JUNE 2007

(i) Financial Instruments

Derivative financial instruments include 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 in initial adoption. Transpower has substantially completed 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. To date, the opening balance sheet (1 July 2006) has been completed and has been audited. The adjustments to the balance sheet are shown below. The adjustments relating to the year ended 30 June 2007 are still to be completed.

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 differences between NZ GAAP and NZ IFRS.

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 calculations below, and the differences may be material.