Categories of financial instruments
The following categories of financial instruments are carried in the Balance Sheet:
Financial instruments are defined as contracts that give rise to a financial asset of one entity and a financial liability or equity of another. The figures included in the Balance Sheet are adjusted to exclude items that are deemed exempt. This includes but is not limited to accruals, prepayments, receipts in advance and statutory debts.
Income, expense, gains and losses
Fair values of assets and liabilities
Financial liabilities, financial assets represented by loans and receivables and long term creditors are carried in the Balance Sheet at amortised cost. Under the Code, the Legacy Corporation is required to disclose information comparing the fair values and carrying values for those financial instruments whose carrying value is not a reasonable approximation for fair value. The following table gives this information:
31 March 2015 31 March 2014
£’000 £’000
Financial assets Current
Loans and receivable at amortised costs 21,155 11,402
Net cash and cash equivalents 21,025 21,348
Total financial assets 42,180 32,750
Financial liabilities Current
Financial liabilities at amortised costs (11,583) (18,035)
Non-current
Financial liabilities at amortised costs (176,704) (3,060)
Total financial liabilities (188,287) (21,095)
2014/15 2014/15 2013/14 2013/14 Financial liabilities measured at amortised costs Financial assets: loans and receivables Financial liabilities measured at amortised costs Financial assets: loans and receivables £’000 £’000 £’000 £’000 Interest expense - - - - Interest income - (6) - (197)
Where an instrument will mature in the next 12 months, the carrying amount is assumed to approximate to fair value. Hence, short term debtors and creditors are carried at cost as this is a fair approximation of their value.
Borrowings consist entirely of capital loan funding from the Greater London Authority, previously funded by capital grant.
The long term creditors consisted mostly of PWLB borrowing. Under the 2014/15 Code of Practice, these forms of borrowing are measured at amortised cost.
Nature and extent of risks arising from financial instruments
The Legacy Corporation’s activities expose it to a variety of financial risks, primarily:
Treasury management risk – the risk of cash deposits not actually being secure or earning appropriate interest.
Credit risk- the possibility other parties might fail to pay amounts due to the Legacy Corporation.
Liquidity risk- the possibility that the Legacy Corporation may not have the funds available to meet its commitments to make payments as they arise.
Market risk – the possibility that financial loss might arise as a result of changes in interest rates.
Treasury management risk
Maintaining affordability of borrowings, preserving invested principal and maintaining prudent levels of liquidity are the key treasury management objectives of the Legacy Corporation. The execution and operational aspects of investment and borrowing, together with the management of external advisors, are delegated to the Greater London Authority (GLA) under a shared service agreement managed by the Executive Director of Finance and Corporate Services. The nature of the Legacy Corporation’s current funding model means treasury operations are focussed on the management of short term cash balances. The objectives are security of capital, meeting the organisation’s operational cash flow requirements and obtaining the best available yield from balances available for investment. The priorities are ranked in that order, security, liquidity then yield. A risk sharing agreement ensures risk and return relating to each instrument within the jointly controlled portfolio are shared in direct proportion to each participant’s investment. The Legacy Corporation has currently invested £15.6m in the GLA Group Investment Syndicate (GIS) and does not expect any losses in relation to the investments placed.
2014/15 2014/15 2013/14 2013/14
Carrying amount Fair value Carrying amount Fair value
£’000 £’000 £’000 £’000
Financial assets
Loans and receivable 21,155 21,185 11,402 11,402
Cash and cash equivalents 21,025 21,025 21,348 21,348
Total financial assets 42,180 42,210 32,750 32,750
Financial liabilities at amortised costs
Borrowings (170,626) (170,641) - -
Short-term creditors (11,583) (11,583) (18,035) (18,035)
Long-term creditors (6,078) (6,078) (3,060) (3,060)
Credit risk
Credit risk is the possibility that other parties may not pay amounts due to the Legacy Corporation. The Legacy Corporation carries out certain functions for which charges are levied and for which invoices have to be raised. Prior to most contracts being agreed, creditworthiness checks on potential suppliers or business partners are performed.
The table below shows the gross amounts due to the Legacy Corporation from its financial assets, and the amounts which have been impaired due to likely uncollectability. The net carrying value which is shown on the balance sheet represents the maximum credit risk to which the Legacy Corporation is exposed.
Liquidity risk
Liquidity risk is the risk that the Legacy Corporation will not be able to meet its financial obligations as they fall due. The Legacy Corporation’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to its reputation.
Cash flow forecasts are prepared and given to the GLA to inform cash drawdown and an agreement is in place for emergency cash drawdown available within 24 hours should the need arise. The Legacy Corporation also maintains a prudent balance of cash with its bankers to ensure that its liquidity objective is met. Borrowing within the prescribed limits is permissible where so doing represents prudent management of the Legacy Corporation’s affairs although direct borrowing for capital expenditure is not currently authorised. The table below shows the long term borrowing of the Legacy Corporation by date of maturity.
£’000
Gross value
Impairment
value Net Value
Deposits with financial institutions 21,019 21,019 Accrued interest on deposits 6 6 Debtors with joint-venture entity 11,846 11,846 Trade debtors 9,432 (123) 9,309 Total exposure 42,303 (123) 42,180 As at 31st March 2015 2014/15 2013/14 £’000 £’000 Maturing in 1 - 2 years 37,235 1,840 Maturing in 2 - 5 years 34,878 1,220 Maturing in 5 - 10 years 104,591 -
Maturing in more than 10 years - -
Long term financial liabilities with more than one year to mature 176,704 3,060
Long term financial liabilities maturing within one year 906 1,093