Statement of Accounts 2011/2012 - Blackburn with Darwen Borough ...

NOTES TO THE FINANCIAL STATEMENTS
In the case of PWLB loans, fair values were provided by the PWLB, using premature repayment rates.
For Market Loans, fair values have been prepared by the Council’s treasury advisors, relating to PWLB loan
repayment rates, discounted in line with in-year experience. This gives an indicative exit price (rather than an
indicative purchase price) and is more consistent with the PWLB’s own methodology for advising fair values. It
should be noted that the carrying values in respect of a number of market loans with “stepped” (initially lower)
interest rates have already been amended (see Note 1- accounting policy i) ).
In the case of other stock, fair values have been prepared by the Council’s Treasury advisors in respect of the
only material element, an issue of irredeemable stock, on the basis of the discount rate for undated gilts.
The overall fair value of the Council’s debt is higher than the carrying value because, predominantly, the debt held
is at interest rates higher then the rates that were available for comparable debt at the balance sheet date. This
increases the amount that the Council would have to pay if the lender requested or agreed to early repayment of
the loans.
45 The nature and extent of risks arising from financial instruments
The Council’s activities expose it to a variety of financial risks:
• Credit risk – the risk that other parties may fail to pay amounts due to the Council.
• Liquidity risk – the risk that the Council may not have funds available to meet commitments to make payments.
• Market risk – the risk that financial loss may arise as a result of changes in financial markets, e.g. movements in
interest rates.
The Council’s risk management programme recognises these risks and seeks to minimise any potential adverse
effects on the resources available to fund services. Risk management in relation to the finance function is carried
out by a central Treasury Management Group, under policies approved as part of the Council’s Annual Treasury
Management Strategy.
Credit risk
Credit risk arises from deposits made with financial institutions, as well as credit exposure to the Council’s
customers. The safeguarding of the Council’s investments is the main priority of the Council’s Investment
Strategy, which is established before the start of each year, alongside the setting of the Council’s annual budget.
This sets fixed limits as to the duration of loans and amounts invested, using annually reviewed criteria, based on
independently monitored credit rating scores for financial institutions. This lending list is reviewed frequently in line
with the latest information from the Council’s treasury advisors. The highest value and longest dated investments
are only made in very highly rated institutions. Limits were applied to investments in foreign-domiciled banks, and
to overall balances in the building society sector.
Working within the established criteria, the categories of investment made and key limits relating to them were
(a) AAA rated money market funds – instant access – upper limit £5 million per fund,
(b) credit rated banks and building societies – limits in three bands, ranging from minimum short-rating F1 (limits
£3 million and 3 months) to minimum long-rating AA (limits £5 million and 364 days),
(c) unrated building societies with minimum asset size £500 million (maximum £1 million and 3 months),
(d) deposits with other local authorities (limits £4 million and 364 days),
(e) deposits with the Government’s Debt Management Office (no limits).
Separate criteria applied to longer term investments (over one year), but no long term investments were made
during the year.
The Council has not suffered any loss due to default by financial institutions, and has controls in place to minimise
the risk of default in future. For example, lending limits are utilised to limit the extent of any loss, should a default
take place. In response to market conditions, the Council has continued to limit the amount of borrowing
undertaken, thereby reducing the potential credit risk arising from placing deposits.
An assessment was undertaken, by the Council’s treasury advisors, of the value of the Council’s exposure to
credit risk on its investment portfolio, based on credit rating agency determinations of historical exposure to risk
by rating category and outstanding duration of debt. Even making an allowance for current market conditions, the
value is not material.
With regard to the Council’s interaction with its customers, where practicable, payments are sought by direct debit
in order to minimise arrears and reduce credit risk. The Council considers the risk of exposure to non-payment
and has made provision accordingly.
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