Circular 2005/01 - Specific accounting requirements

This circular is an extension of Circular 2004/17 issued October 2004.

Date : 6 May 2005
Circular Number : 2005/01
Category : Finance

Specific Accounting Requirements Circular

This circular is: an extension of Circular 2004/17 issued October 2004.

The action required is : Note the contents of this circular and ensure your school incorporates these financial reporting requirements into its 2004 annual report and notes guidance on international students.

It is intended for: Chairpersons of Boards of Trustees, all trustees and principals of all state and state integrated schools.

All those preparing school annual financial statements.

Appointed auditors of schools.

For further information: Direct any enquiries about this circular to your school accounting service provider, your local Ministry of Education Financial AdvisorMinistry of Education Financial Advisor , or your school auditor.

Introduction

This circular provides information, advice and guidance on the preparation of schools’ annual reports for 2004 and information on International Students – Code of Practice and Fee Protection.

Changes to school banking arrangements

The introduction of the Crown Entities Act 2004 means school boards of trustees (boards) will have to follow the new requirements to operate their bank accounts.

This Circular outlines the key requirements that apply to schools’ banking arrangements. The board should review the school’s banking arrangements in light of the new Act and, if necessary, make the required changes.

Timeframe

The new provisions apply from 25 July 2005 . This means that by 25 July this year your school’s banking arrangements must comply with the new provisions.

The new provisions

The new provisions apply to all bank accounts, including term deposit bank accounts, operated by your school. The technical references are contained in section 158 of the Crown Entities Act and the associated regulations. Appendix 1 to this letter sets out the technical references.

The requirements for bank accounts under the Act

1. The bank accounts for your school must be established, maintained and operated by the board and be in the name of the school only;
2. Where the bank account is already in the name of your school, the board should review its current arrangements to be satisfied that all money received is being paid promptly into that bank account;
3. Boards that currently have bank accounts that include the name of a service provider must establish a bank account in the school’s own name before 25 July 2005;
4. Boards are required to ensure that all money received by their school is paid as soon as practicable into the school’s bank account. No income for the school can be paid directly to a service provider, proprietor or any other third party;
5. A board may grant a power of attorney to a service provider to operate the bank account but the board remains ultimately responsible for the bank account.
6. NOTE: Any bank accounts currently held and maintained by service providers in trust type arrangements are no longer allowed under the Act.

Credit rating tests

All bank accounts must be denominated in New Zealand dollars and be with a registered bank or registered building society that satisfies the following credit rating tests:

• “A-“ or higher, or “A-1” or higher for short-term debt securities, as determined by Standard & Poor’s Ratings Group; or
• “A3“ or higher, or “Prime-1” or higher for short-term debt securities, as determined by Moody’s Investors Service.

Those credit rating tests are specified in the attached regulations which came into force on 1 April 2005. Appendix 2 of this Circular gives the list of registered banks in New Zealand and their credit rating. The website link is www.rbnz.govt.nz/nzbanks/0091622.html.

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Term deposit accounts

Term deposit accounts must also be in the name of the school only. The term deposit account must be denominated in New Zealand dollars and be held with a registered bank or other entity that meets the credit rating tests noted above.

Bank accounts at banks outside New Zealand

The regulations in Appendix 1 set out the conditions under which bank accounts in banks outside New Zealand are approved. Generally:

• The accounts must be in New Zealand dollars;
• The bank must meet the credit rating tests noted above.

Other banks

The Minister of Finance may approve “other” registered banks or building societies.

Taranaki Savings Bank Limited

Currently the TSB does not meet the credit rating tests outlined above. The Minister of Finance has indicated that Treasury will work with the Ministry of Education and NZSTA prior to giving advice on requests that boards be authorised to continue banking with TSB. We understand that a decision on this matter should be communicated before 25 July when the section on bank accounts comes into force. Note: This also applies to term deposits or other investments in TSB.

Powers of Attorney

A board may grant a power of attorney to a service provider to make payments or withdrawals from the board’s bank accounts if it wishes. Boards that give the power of attorney to a service provider should review bank statements regularly to ensure that all expected income has been received in full and that all payments have been properly authorised. Boards should also satisfy themselves that they are adequately covered in the event of a mistake or fraud by a service provider.

The board must properly authorise the withdrawal or payment of money from the board’s bank accounts. This means that the power of attorney will need to specify clearly the withdrawals or payments that are being delegated to the service provider.

Changes in credit ratings

If the credit rating of your school’s bank changes in the future so that it no longer meets the specified credit rating tests, there is a ‘period of grace’ of two months during which the board may continue to use that account. By the end of the period of grace the account must be closed and the monies transferred to another account with another bank that does meet the credit rating tests.

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Summary

To summarise, the steps a board should take and matters it must address, if applicable, are:

1. Ensure all of the school’s bank accounts are in the name of the school only;
2. Ensure the bank at which the accounts are held is a registered bank and meets the credit rating tests;
3. Ensure all money received is paid in full into those bank accounts;
4. Advise the Ministry of any change to bank account numbers;
5. Ensure any bank accounts and term deposits held by service providers on behalf of the school are closed;
6. Where a power of attorney is granted to a service provider (or other entity), review bank statements to ensure all expected income is received and all payments properly authorised and that the board is covered if mistakes or fraud occurs;
7. Ensure the instrument granting the power of attorney covers the matters above;
8. Check that any term deposits the school holds are in the name of the school, are held with a registered bank or other entity which meets the credit rating tests above; or where applicable;
9. Make an application for “other” registered banks or building societies which do not meet the credit rating tests by forwarding an application to:
   Raewyn Glover
   Senior Financial Advisor
   Ministry of Education
   PO Box 1666
   Wellington

Further Information

Assistance with regard to school’s bank accounts can be obtained by contacting your Regional Financial Advisor as listed in Appendix 3 .

Issued by

Raewyn Glover
Senior Financial Advisor
National Office
45 – 47 Pipitea Street, Thorndon
P O Box 1666, Wellington, New Zealand
Phone 04-463 8000
Fax 0-4-463 8001

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Appendix 2

List of registered banks in New Zealand and their credit ratings

The credit ratings are applicable to long-term unsecured obligations of the registered bank, payable in New Zealand and in New Zealand dollars, and are as disclosed in the bank's most recently published Key Information Summary.

Banks marked (B) operate in New Zealand as branches of overseas incorporated banks. All other banks are incorporated in New Zealand.

Total number of registered banks = 16

* Note:you will have to register to use the Moody's website.

Last updated: 21 April 2005.

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Appendix 3

Ministry Regional Financial Advisor contact list

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Provisions concerning bank accounts: School boards of trustees

A. Crown Entities Act 2004

Core Provision

Section 158 — Bank accounts of Crown entities

(1) A Crown entity must ensure that all money received by the Crown entity is paid, as soon as practicable after it is received, into 1 or more bank accounts that are established, maintained, and operated by the Crown entity at 1 or more of the following:

1. a registered bank or registered building society that satisfies a relevant credit-rating test specified in either regulations made under this Part or a notice in the Gazette published by the Minister of Finance; or
2. a registered bank or registered building society that meets the conditions of any relevant approval given by the Minister of Finance by notice in the Gazette; or
3. a bank outside New Zealand that meets the conditions of any relevant approval given by the Minister of Finance by notice in the Gazette; or
4. a bank outside New Zealand if the conditions specified in subsection (2) are met.

(2) The conditions referred to in subsection (1)(d) are —

(a) the Crown entity, or the class of Crown entities to which the Crown entity belongs, must be authorised to establish, maintain, and operate 1 or more bank accounts at 1 or more banks outside New Zealand by —

1. the Minister of Finance in writing; or
2. any regulations made under this Part; and

(b) the bank account or bank accounts must be of a type approved by —

1. the Minister of Finance in writing; or
2. any regulations made under this Part.

(2A) A Crown entity must establish, maintain, and operate a bank account referred to in subsection (2) subject to —

1. any regulations made under this Part; and
2. if applicable, any conditions of the authorisation or approval given by the Minister of Finance; and
3. the entity’s Act.

(3) The Minister of Finance must notify in the Gazette an authorisation or approval given under subsection (2)(a)(i) or, as the case may be, subsection (2)(b)(i).

(4) A Crown entity must ensure that it does not establish, maintain, or operate a bank account other than as provided for in subsection (1).

(5) All money in a bank account at a registered bank or registered building society must be denominated in New Zealand dollars unless the Minister of Finance allows otherwise.

(6) A Crown entity must properly authorise the withdrawal or payment of money from a bank account of the Crown entity.

(7) There is a period of grace if a bank account ceases to qualify under subsection (1), and:

1. during that period the Crown entity may continue to pay money into the bank account; but
2. by the end of the period the Crown entity must have closed the account and paid all the money in the account into another bank account that does qualify under subsection (1).

(8) The period of grace ends on the earlier of —

1. 2 months after the bank account ceases to qualify under subsection (1); or
2. a date specified by the Minister of Finance and notified to the Crown entity.
   Compare: 1989 No 44 s 24

Transitional Provision

Section 195 — Existing bank accounts

There is a period of grace of 6 months after section 158 comes into force during which:

1. a Crown entity must continue to comply with section 24 of the Public Finance Act 1989, and (or, as the case may be, or) its entity’s Act (if relevant), as if this Act and Part 1 had not been passed; and
2. neither section 158, nor any amendment of an entity’s Act in relation to bank accounts in Schedule 6 of this Act, apply to a Crown entity.

Definitions

(a) Crown Entities Act 2004

Section 136 — Interpretation for this Part [4]

registered bank has the meaning set out in section 2 of the Reserve Bank of New Zealand Act 1989.

registered building society means a building society within the meaning of the Building Societies Act 1956 that is registered on the register of building societies under that Act.

(b) Reserve Bank Act 1989

Section 2 — Interpretation

Registered bank means a person whose name is entered in the register maintained under section 69 of this Act or who continues to be a registered bank by virtue of the provisions of section 76 of this Act.

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B. Crown Entities (Financial Powers) Regulations 2005

Regulation 2 - Commencement

These regulations come into force on 1 April 2005.

Regulation 3 — Interpretation

In these regulations, unless the context otherwise requires, Act means the Crown Entities Act 2004.

Bank accounts

Regulation 4 — Purpose of regulations 5 to 8

The purpose of regulations 5 to 8 is to provide for the establishment, maintenance, and operation of bank accounts by Crown entities.

Regulation 5 — Minimum requirement for bank accounts

(1) The minimum requirement in order to be a bank account under these regulations and sections 158 and 161 of the Act is that there is a contract with a registered bank, registered building society, or a bank outside New Zealand that —

(a) contains a covenant by the bank or building society to keep a record of the amount it owes its account customer by reason of the deposit of money with the bank or building society for the account of its account customer; and

(b) provides that that amount is repayable in whole or in any part upon demand by the account customer; and

(c) does not comprise —

1. a cash or term deposit; or
2. a fund; or
3. any other form of investment in the debt securities of the bank or building society consisting of a specified amount of debt that is repayable only in whole.

(2) Other contracts or accounts are not bank accounts for the purposes of these regulations or sections 158 and 161 of the Act.

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Regulation 6 — Minimum requirement for banks outside New Zealand

(1) The minimum requirement in order to be a bank outside New Zealand under these regulations and section 158 of the Act is that the financial institution must be entitled by the laws of the jurisdictions in which it operates to include, in its name or title, —

1. the word ‘‘bank’’, ‘‘banker’’, or ‘‘banking’’; or
2. any of those words as part of another word; or
3. a translation of those words into another language (whether or not the translation of those words is part of any other word).

(2) Other financial institutions are not banks outside New Zealand for the purposes of these regulations or section 158 of the Act.

Regulation 7 — Credit-rating test for registered banks and registered building societies

(1) A registered bank or registered building society satisfies the credit-rating test referred to in section 158(1)(a) of the Act only if —

1. it satisfies 1 of the specified tests and does not have a credit rating assigned to it by any other specified credit rating organisation; or
2. it satisfies the specified test that applies to each of the specified credit-rating organisations that have assigned a credit rating to it.

(2) The following are specified tests for the purposes of section 158 of the Act:

1. Standard & Poor’s Ratings Group (or its successors or assigns) rates the credit of the relevant registered bank or registered building society ‘‘A-’’ or higher or, if that credit is short term, ‘‘A-1’’ or higher; or
2. Moody’s Investors Service, Inc (or its successors or assigns) rates the credit of the relevant registered bank or registered building society ‘‘A3’’ or higher or, if that credit is short term, ‘‘Prime-1’’ or higher.

(3) In this regulation, —

credit means —

1. subclause (2); or
2. a notice in the Gazette published by the Minister of Finance under section 158(1)(a) of the Act.

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Regulation 8 — Bank account at bank outside New Zealand

(1) A bank account at a bank outside New Zealand is approved for the purposes of section 158(2)(b)(ii) of the Act if —

1. the bank account comprises debt owed and payable in New Zealand currency; and
2. except as set out in subclause (2), the credit of the bank satisfies the credit-rating test for registered banks and registered building societies stipulated in regulation 7(1) as if it were a registered bank or a registered building society; and
3. the laws of the jurisdiction under which the bank operates the bank account do not discriminate between classes of unsecured creditors except upon grounds, and only to the extent, set out in a subordination covenant; and
4. the central bank of the jurisdiction in which the bank operates the bank account is a shareholder in the Bank for International Settlements.

(2) In subclause (1)(b), credit means —

1. long-term unsubordinated unsecured foreign currency debt obligations payable in the home jurisdiction of that foreign currency; or
2. if a bank outside New Zealand does not issue long-term debt as set out in paragraph (a), short-term unsubordinated unsecured foreign currency debt obligations payable in the home jurisdiction of that foreign currency