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Notes to the Core Financial Statements • Liquidity Risk – the possibility that the Council might not have the funds available to meet its payment commitments; and, • Market Risk – the possibility that a financial gain or loss might arise for the Council due to movements in interest rates, market prices, foreign currency exchange rates, etc. The Council’s investment in the CCLA is subject to the risk of falling commercial property prices. This risk is limited by the Council’s maximum exposure to property investments of £1.5m. A 5% fall in commercial property prices would result in a £75,000 charge to Other Comprehensive Income & Expenditure – this would have no impact on the General Fund until the investment was sold. Credit Risk The Council has adopted CIPFA’s Code of Practice on Treasury Management (and subsequent amendments), and complies with the Prudential Code for Capital Finance in Local Authorities. Credit risk arises from deposits with banks and financial institutions (counterparties), as well as credit exposure to the Council’s customers. The Council protects the security of the cash it deposits with counterparties using a number of risk management techniques. Principal among these is the evaluation of counterparty risk, which uses a combination of credit ratings and limits on the term and maximum value of any deposits. The Council seeks to reduce counterparty risk by adjusting the maximum amounts that may be invested with institutions. The details can be found in the Council’s Treasury Management Strategy. The table below summarises the Council’s investment portfolio at 31 March 2016. All investments made were in line with the Council’s approved credit rating criteria at the time of placing the investment, and still met those criteria at 31 March 2016. Table 5 Counterparty (MMF = Money Market Funds) Long- Term Rating Balance Invested at 31 March 2016 £’000 Up to Greater than 1 Greater 1 month and up than 3 month to 3 months months Total 59 Balance Invested at 31 March 2015 £’000 Svenska Handelsbanken* Aa2 3,000 3,000 3,000 Santander Bank* A1 3,000 3,000 3,000 Barclays Bank A2 0 3,000 Lloyds Bank A1 0 3,000 Standard Chartered Bank A1 3,000 3,000 3,000 Nationwide Building Society A1 0 3,000 HSBC Bank Aa2 3,000 3,000 0 Debt Management Office (T-Bills) 5,989 5,989 0 Leeds Building Society A2 0 1,000 Close Brothers Aa3 1,000 1,000 0 BNP Paribas MMF* Aaa-mf 3,000 3,000 1,500 Goldman Sachs MMF* Aaa-mf 0 1,500 Morgan Stanley MMF* Aaa-mf 376 376 300 Black Rock MMF* Aaa-mf 3,000 3,000 0 CCLA Property Fund 1,504 1,504 1,418 Total 24,365 1,000 1,504 26,869 23,718 *These investments are cash and cash equivalents in the Balance Sheet. The rest are short-term investments, except for the CCLA Property Fund investment. The ratings above are from Moody’s credit rating agency. The long-term rating is the benchmark measure of probability of default. The default based on the experience gathered over the last five financial years is nil and the default adjusted for current market conditions is nil. Therefore, the estimated maximum exposure to default is nil as at 31 March 2016 (nil as at 31 March 2015). A description of the grading is provided below:
• Aaa-mf • Aa3, Aa2 • A1, A2 The Council’s Relationship With Other Organisations 45. Related Parties Notes to the Core Financial Statements – Money market funds rated Aaa-mf have very strong ability to meet the dual objectives of providing liquidity and preserving capital. – Investments rated Aa3 and Aa2 are judged to be of a high quality and are subject to very low credit risk. – Investments rated A1 and A2 are considered upper-medium grade and are subject to low credit risk. The Council’s Relationship With Other Organisations The Council is required to disclose material transactions with related parties – bodies or individuals that have the potential to control or influence the Council or to be controlled or influenced by the Council. Disclosure of these transactions allows readers to assess the extent to which the Council might have been constrained in its ability to operate independently or might have secured the ability to limit another party’s ability to bargain freely with the Council. Central Government Central Government has significant influence over the general operations of the Council – it is responsible for providing the statutory framework within which the Council operates, providing funding in the form of grants and prescribes the terms of many of the transactions that the Council has with other parties (e.g. council tax bills, business rates, housing benefits). Unring-fenced grants received from Government departments are set out in the CI&ES and the total grants received from Government are shown in note 11. Members and Officers Members of the Council have direct control over the Council’s financial and operating policies. The total of members allowances paid in 2015/16 is shown on note 9. During 2015/16, no works or services were commissioned from companies in which members had an interest. No grants were made to organisations whose senior management included close members of the families of members. The Council maintains a “Register of Members’ Interests”, which is open to public inspection at the Council offices during office hours. There has been an approach to elected members and senior management seeking from them a declaration that neither they, nor close family nor anyone in the same household have been involved in any material transactions with the Council. Returns were received in respect of the 2015/16 financial year from all members and senior officers and there were no transactions considered of material significance to warrant separate disclosure in the Annual Accounts. During 2015/16, no officers declared a pecuniary interest in accordance with section 117 of the Local Government Act 1972. Entities Controlled or Significantly Influenced by the Council Payment of a subsidy of £80,000 was made to Faversham Pool in 2015/16 (revenue grant of £80,000). The Trust is deemed to be influenced significantly by the Council through its representation on the Trust board. It is our opinion that none of the above transactions have the ability to influence the Council’s decisions or priorities. We have therefore considered these not to be material. 46. Group Accounts The Code contains detailed requirements for the production of group accounts and a review was undertaken to identify any subsidiaries, associates, or joint ventures, which would establish whether a group relationship exists for the purposes of the Council’s Statement of Accounts. Two interests were identified and details of these are set out below: • Faversham Swimming Pool Management Committee (FSPMC) – the Council appoints the majority of the governing body to this entity and under the revised arrangements this then falls within the definition of a subsidiary. The FSPMC is a charitable trust, which operates a swimming pool complex for the benefit of 60
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