2011-2012 Annual Report - Full Version - PDF - Palmerston North ...

Financial Statements Note 1LeasesFinance leasesA finance lease is a lease that transfers to the lesseesubstantially all the risks and rewards incidental toownership of an asset, whether or not title is eventuallytransferred.At the commencement of the lease term, PNCC recognisesfinance leases as assets and liabilities in the statement offinancial position at the lower of the fair value of the leaseditem or the present value of the minimum lease payments.The finance charge is charged to the surplus or deficit overthe lease period so as to produce a constant periodic rate ofinterest on the remaining balance of the liability.The amount recognised as an asset is depreciated over itsuseful life. If there is no certainty as to whether PNCC willobtain ownership at the end of the lease term, the asset isfully depreciated over the shorter of the lease term and itsuseful life.Operating leasesAn operating lease is a lease that does not transfersubstantially all the risks and rewards incidental toownership of an asset. Lease payments under an operatinglease are recognised as an expense on a straight-line basisover the lease term.Cash and cash equivalentsCash and cash equivalents includes cash on hand, depositsheld at call with banks, other short-term highly liquidinvestments with original maturities of three months orless, and bank overdrafts.Bank overdrafts are shown within borrowings in currentliabilities in the statement of financial position.Trade and other receivablesTrade and other receivables are initially measured atfair value and subsequently measured at amortised costusing the effective interest method, less any provision forimpairment.Financial assetsFinancial assets and liabilities are initially recognised atfair value plus transaction costs unless they are carriedat fair value through surplus or deficit in which case thetransaction costs are recognised in the surplus or deficit.Purchases and sales of financial assets are recognised ontrade-date, the date on which PNCC commits to purchaseor sell the asset. Financial assets are derecognised when therights to receive cash flows from the financial assets haveexpired or have been transferred and PNCC has transferredsubstantially all the risks and rewards of ownership.PNCC classifies its financial assets into the followingcategories:• fair value through surplus or deficit,• loans and receivables,• held-to-maturity investments, and• fair value through other comprehensive income.The classification depends on the purpose for which theinvestment was acquired. Management determines theclassification of its investments at initial recognition.Financial assets at fair value through surplus or deficitFinancial assets at fair value through surplus or deficitinclude financial assets held for trading. A financial asset isclassified as held for trading if acquired principally for thepurpose of selling in the short term or it is part of a portfolioof identified financial instruments that are managedtogether and for which there is evidence of short-termprofit taking. Derivatives are also categorised as held fortrading unless they are designated as hedges (PNCC doesnot apply hedge accounting).Assets in this category are classified as current assets unlesssettlement is beyond twelve months and in management’sassessment they are likely to be held to maturity or are notexpected to be realised within 12 months of the balancesheet date.After initial recognition they are measured at their fairvalues with gains or losses on remeasurement recognisedin the surplus or deficit.Loans and receivablesLoans and receivables are non-derivative financial assetswith fixed or determinable payments that are not quoted inan active market. They are included in current assets, exceptfor maturities greater than 12 months after the balancedate, which are included in non-current assets. PNCC’sloans and receivables comprise cash and cash equivalents,trade and other receivables, term deposits, community andrelated party loans.After initial recognition they are measured at amortisedcost, using the effective interest method, less impairment.Gains and losses when the asset is impaired or derecognisedare recognised in the surplus or deficit.Loans to community organisations made by PNCC at nil,or below market interest rates are initially recognisedat the present value of their expected future cash flows,discounted at the current market rate of return for a similarfinancial instrument. The loans are subsequently measuredat amortised cost using the effective interest method. Thedifference between the face value and present value of theexpected future cash flows of the loan is recognised in thesurplus or deficit as a grant.Held to maturity investmentsHeld to maturity investments are non-derivative financialassets with fixed or determinable payments and fixedmaturities that PNCC has the positive intention and abilityto hold to maturity.After initial recognition they are measured at amortisedcost, using the effective interest method, less impairment.Gains and losses when the asset is impaired or derecognisedare recognised in the surplus or deficit.Assets in this category did include the directly held NZbonds as part of the Long Term Investment Fund howeverall bonds are now categorised at fair value through surplusor deficit.Financial assets at fair value through othercomprehensive incomeFinancial assets at fair value through other comprehensiveincome are those that are designated at initial recognitionor are not classified in any of the other categories above.They are included in non-current assets unless managementintends to dispose of the investment within 12 monthsof the balance date. PNCC’s financial assets at fair valuethrough other comprehensive income include:• investments that PNCC intends to hold long-term butwhich may be realised before maturity (i.e. unlistedshares held in Civic Assurance), and• shareholdings that PNCC holds for strategic purposes.140Palmerston North City Council Annual Report 2011/12