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

For example, an increase in interest rates would have the following effects:
NOTES TO THE FINANCIAL STATEMENTS
• Borrowing at variable rates – increased interest expense would be charged to the Surplus or Deficit on
the Provision of Services
• Borrowing at fixed rates – the fair value of borrowing liabilities would fall
• Investment at variable rates – increase interest income would be credited to the Surplus or Deficit on the
Provision of Services
• Investment at fixed rates – the fair value of investment assets would rise (though this still may not be
material)
Over recent years, relatively low interest rates have meant that the Council has been able to take borrowing at
very competitive fixed rates, and has reduced its exposure to the risk of interest rate increases on borrowing (but
increasing its exposure to a risk of not benefiting from any future interest rate reductions).
In 2011/12, if interest rates had been 1% higher with all other variables held constant, interest earned on
investments would have increased by around £320,000. A 1% interest rate increase would have increased the
cost of borrowing by £53,000, with respect to the new borrowing undertaken during the year, as all debt carried at
the start of the year was at fixed rates. Such changes would have impacted on the Income and Expenditure
Account.
Conversely, the impact of a 1% fall in interest rates on borrowing costs would have saved as much as the cost of
an increase, noted above. Such a fall in rates would have also eliminated interest earned on investments, costing
around £240,000 in the year.
A 1% change in interest rates would also impact on the fair value of fixed rate investments and borrowings, which
can be considered by varying the discount rates used in their estimation. In the case of the fair values of
investments, this would remain relatively immaterial. It would be more significant for the fair value of borrowings,
where a 1% increase in rates would decrease the fair value by over £5 million and a 1% decrease in rates would
increase the fair value by approaching £7 million. This would not impact on either Surplus or Deficit on the
Provision of Services, or the Movement in Reserves Statement, but only on the values recognised in Note 44.
The Council has a number of strategies to manage interest rate risk, for example limiting the total level of net
borrowing (borrowing less investment) which is at variable rates, and setting an upper limit for net borrowing at
fixed interest rates. It also employs treasury advisors to assist with taking investment and borrowing decisions,
including such matters as debt restructuring (repaying debt early and taking out replacement debt on current
terms - depending on interest rates available at various borrowing durations). The impact of potential changes in
interest rates is considered in the setting of the annual budget, and is monitored across the year, to allow any
adverse changes to be accommodated.
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