The capital adjustment account contains the amounts which are required by statute to be set aside from capital receipts for the repayment of external loans, the amount of capital expenditure financed from revenue and capital receipts, and adjustments to the Revaluation Reserve. It also contains the difference between amounts provided for depreciation and that required to be charged to revenue to repay the principal element of external loans.
The usable capital receipts reserve represents the capital receipts available to finance capital expenditure in future years after setting aside the statutory amounts for the repayment of external loans.
liquidity risk – the possibility that the Authority might not have funds available to meet its commitments to make payments; and
market risk – the possibility that financial loss might arise for the Authority as a result of changes in such measures as interest rates and stock market movements.
The Authority’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the resources available to fund services. Risk management is carried out by the Finance Directorate, under policies approved by the Authority in its treasury management strategy.
(a) Credit risk
Credit risk arises from deposits with banks and financial institutions, as well as credit exposures to the Authority’s customers. Deposits are not made with banks and financial institutions unless they are rated independently with a minimum score of P1 and A3 (Moody’s) and F1 and A (Fitch’s), with weightings of the total amounted deposited in the highest rated categories. The Authority has a policy of spreading of its surplus balances over several source institutions.
(b) Liquidity risk As the Authority has ready access to borrowings from the Public Works Loans Board, there is no significant risk that it will be unable to raise finance to meet its commitments under financial instruments. There is a future risk that the Authority will be bound to replenish a proportion of its borrowings at a time of unfavourable interest rates, however this risk is several decades in the future and will be significantly covered by MRP balances.
(c) Market risk (i) Interest rate risk The Authority is exposed to marginal risk in terms of its exposure to interest rate movements on its borrowings and investments.
Borrowings are not carried at fair value, so nominal gains and losses on fixed rate borrowings would not impact on the Income & Expenditure Account or Statement of Recognised Gains and Losses. However, changes in interest payable and receivable on variable rate borrowings and investments will be posted to the Income & Expenditure Account and affect the General Fund Balance pound for pound. Movements in the fair value of fixed rate investments will be reflected in the Statement of Recognised Gains and Losses.
(ii) Price risk The Authority does not generally invest in equity shares but the Group Accounts do reflect shareholdings in a number of subsidiaries. The Group is consequently exposed to losses arising from movements in the prices of the shares.
As the shareholdings have arisen in the acquisition of specific interests, the Group is not in a position to limit its exposure to price movements by diversifying its portfolio.
The shares are all classified as ‘available for sale’, meaning that all movements in price will impact on gains and losses recognised in the Statement of Recognised Gains and Losses.
Merseyside Integrated Transport Authority
Notes To The Financial Statements (Cont’d)
(iii) Foreign exchange risk
The Authority has no financial assets or liabilities denominated in foreign currencies and thus has no exposure to loss arising from movements in exchange rates.
During 2007/08, a number of PWLB loans were repaid and replaced with loans having more favourable terms. At the same time, a net discount of £115k was paid to the MITA. This net discount is amortised annually to 2017/18, and resulted in a net balance, against the original £115k, of £89k as at 31 March 2009.