Accountant claims surplus result of 'clever accounting'

ROB STOCK
Last updated 15:02 27/07/2014
Christchurch convention centre
Joseph Johnson/Fairfax NZ

REPLACEMENT PLANS: The Christchurch Convention Centre was demolished after being badly damaged in the quakes.

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The Government has promised the country a wafer-thin $372 million surplus this year, but quake-affected Christchurch accountant Cameron Preston doubts there would be one without clever accounting for the costs of the Canterbury rebuild.

It's clear the National Government has reined in some non-earthquake-related spending to help balance the books.

As a Government spokesman said: "Despite meeting the impact of the domestic recession, which started under the previous government in 2008, the GFC and the significant costs of the earthquakes, the latest Budget shows the Government is on track to a small surplus this year."

However Preston believes the promised surplus, so soon after NZ's worst disaster in recent history, coupled with its debt position, is too good to be true.

His claim of clever accounting focuses on three areas.

The first is that the Government is failing to recognise any obligation to contribute to fixing earthquake-damaged roads in Canterbury.

"While the popular misconception is that Central Government has recognised an estimate of this cost, in reality they have only recognised costs associated with underground pipes and drainage, not roads," Preston said.

The Christchurch City Council had to sign a cost-sharing agreement last year "at the 11th hour", he said, which cancelled the Government's obligation to cover 83 per cent of all roading reinstatement costs after a natural disaster. The agreement capped drainage and roading costs at $1.8b, but because drainage costs have since blown out, effectively there will be no money left for road repairs, Preston said.

The Government's original budget in 2013 for fixing Christchurch's horizontal infrastructure - the pipes, roads and waterways - was $567 million higher at $2.3b.

The Press reported last month that Opposition MPs claimed the drop was a financial sleight of hand aimed at making the Government's books look healthier while the Government responded it was simply a more accurate reflection of the true costs.

The city council has said the costs were likely to end up being much higher than predicted and it faces a potential $534m budget shortfall.

Government's stance on Canterbury's local roads was that the earthquakes did not create a new obligation, but simply "increased the priority" for their repair and replacement.

Repairs would be funded out of "future revenue", something Treasury confirmed to the Sunday Star-Times, saying: "Future expenses will be recognised at the same time the revenue that will be used to fund those repairs is recognised."

Labour's David Parker said it "stretched credibility" that at a time that Christchurch City Council was forecasting cost increases, the Government was relying on the $1.8b cap. He described it as convenient for the Government that the cost-sharing agreement with the council will be reviewed in December, after the general election, while the $1.8b cap continues to keep the Government's recognised liability down.

The second area Preston questioned in the public accounts is that some of the expenses for the Christchurch rebuild were being "capitalised".

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This means the expenditure appears on the Government's statement of cashflows, and as an asset on its balance sheet, but not on its profit-and-loss statement, which is called its statement of financial performance, and so doesn't have an impact on the forecast surplus.

In the case of the rebuild, the amount to be "capitalised" has increased from $0.6b in December 2012, to $3.3b in Budget 2014.

While a legitimate accounting move, it relies on central Government retaining ownership of Christchurch's anchor projects, such as the Convention Centre and Stadium.

"By central Government owning these projects, instead of the outgoing cash affecting its annual operating position, it's going straight to the balance sheet," Preston said.

"It started as operating expenditure, but as soon as the costs started blowing out, central Government decided they would own the assets," Preston said.

The third area Preston points to is that by law the Government has to fund any gap between the claims for damage to land and homes accepted by the Earthquake Commission (EQC) and the money the EQC has to pay them. Preston said the total costs of the Canterbury earthquakes to EQC was $12.5 billion, yet it had only $6b in the bank at the time. Since then it has added $4.5b it recovered from its reinsurance to its coffers, he said.

Preston says the Government believes it won't have to pay the $2b shortfall, which concerns him, given complaints by Christchurch residents about rebuild delays and under-assessment of damage to land and homes.

"They should be recognising a provision for the deficiency now. The only reason they aren't recognising the liability now is because it would hit their surplus," Preston said.

Treasury acknowledged the way the EQC deficit was being accounted helped the forecast surplus. "While deficit-funding does not impact OBEGAL (operating balance excluding gains and losses), it does impact net debt as net debt is a core Crown measure," Treasury said.

Finance Minister Bill English denied the Government had any influence over Treasury's decisions about how it put together the nation's accounts, although Parker claimed considerable political pressure could be applied.

In a written statement, English said: "Decisions about how Budget initiatives are accounted for are made independently by the Treasury, which applies Generally Accepted Accounting Practice (GAAP) standards when preparing and presenting financial statements.

Treasury echoed that: "The Treasury is solely responsible for ensuring its forecasts represent its officials' best professional judgement on the basis of economic and fiscal information available at the time that forecasts are finalised."

- Sunday Star Times

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