Scottish Government consolidated accounts: 2018-2019

10. Financial Instruments

The Scottish Government measures and presents financial instruments in accordance with International Accounting Standard (IAS) 32, International Financial Reporting Standard (IFRS) 7 and IFRS 9 as interpreted by the Financial Reporting Manual. IFRS 7, Financial Instruments: Disclosures, requires disclosure of the role that financial instruments have played during the period in creating or changing the risks that an entity faces in its activities. The Scottish Government is not exposed to the degree of financial risk faced by business entities because of the largely non-trading nature of its activities and the way that government is financed. Moreover, financial instruments play a much more limited role in creating or changing risk than would be typical of the listed companies to which IFRS 7 mainly applies. Financial assets and liabilities are generated by day to day operational activities and are not held to change the risks facing the Organisation in undertaking its activities.

Liquidity Risk

The Scottish Parliament makes provision for the use of resources by the Scottish Government, for revenue and capital purposes, in a Budget Act for each financial year. Resources and accruing resources may be used only for the purposes specified and up to the amounts specified in the Budget Act. The Act also specifies an overall cash authorisation to operate for the financial year. The Scottish Government is not, therefore, exposed to significant liquidity risks.

A maturity profile of the carrying amount of financial liabilities is presented below. This analysis satisfies the disclosure requirements of International Financial Reporting Standard 7, Financial Instruments: Disclosures (IFRS 7). The maturity profile for NLF loans is matched by the corresponding profile for the related fixed asset investments. The amounts disclosed are undiscounted cash flows as per IFRS 7.

Maturity Profile

Financial Liabilities	<1yr	1 - 2 yrs	2 - 5 yrs	>5yrs	2018-19 Total	2017-18 Total
	£m	£m	£m	£m	£m	£m
Trade payables	504	-	-	-	504	449
Accruals	1,561	2	-	-	1,563	1,622
Other payables	337	106	-	-	443	411
NLF loans	27	33	176	355	591	622
Accrued Interest due on NLF Loans	8	-	-	-	8	9
Balances Payable to SCF	24	-	-	-	24	-
Corporate balance with SCF	979	-	-	-	979	585
PFI Deferred Residual Interest	-	-	-	-	-	-
PFI Imputed finance leases	91	78	252	2,694	3,115	2,988
Lease payables	1	1	5	16	23	25
Bank overdraft	-	-	-	-	-	2
Financial guarantees	-	-	-	-	-	18
Total	3,532	220	433	3,065	7,250	6,731

Credit risk

Credit risk is the risk that a third party will default on its obligations. The maximum exposure to credit risk at the Statement of Financial Position date in relation to each class of financial asset is the carrying amount of those assets net of any impairment. No collateral is held as security.

Cash at bank is held with major UK banks. The credit risk associated with cash at bank is considered to be low.

The only area where the Scottish Government has significant concentrations of credit risk is on student loans. The Scottish Government has a statutory obligation to issue student loans and seek repayments in line with legislation. The Scottish Government is not permitted to withhold loans on the basis of poor credit rating nor is it able to seek collateral. The Scottish Government is therefore exposed to the risk that some student loans will not be repaid, although this is partly mitigated by the fact that most repayments are collected by Her Majesty's Revenue and Customs as part of the tax collection process. In addition this risk is mitigated through the valuation of student loans at fair value.

Market risk

There are a number of areas where the Scottish Government is exposed to potential market risk. These relate to interest rates, foreign currency risk and housing market risks.

Interest Rate Risk

65% (2017-18: 67%) of the Scottish Government's financial assets and 100% (2017-18: 100%) of its financial liabilities carry nil or fixed rates of interest and they are not therefore exposed to significant interest rate risk. The portion of the Scottish Government's financial assets that carry a floating rate of interest relates in the main to student loans.

Foreign Currency Risk

Within payables, the Scottish Government has a balance that is subject to exchange rate fluctuations. This relates to advances received by the Economy, Jobs and Fair Work portfolio from the European Commission (EC) for the 2014-20 European Structural Funds (ESF) programme. The year end balance of £27.455m is the sterling equivalent of €32.110m translated at the accounting date (using the official EU exchange rate as at 31 March 2019).

The Scottish Government has instituted funding advances for certain EU CAP payments. Euro denominations are sold once EU funding is received. As at 31 March the year end balance of £95.488m is the sterling equivalent of €106.888m.

Where there are other transactions denominated in Euros the exchange rate is managed within the programmes.

The Scottish Government has no other significant exposure to foreign currency risk.

Housing Market Risk

The Scottish Government engages in a number of shared equity housing schemes, and is exposed to the risk of potential falls in the value of the housing market. The current investment in such schemes is £952.6m (2017-18: £860.7m).

Categories of financial assets and financial liabilities

The Scottish Government has the following categories of financial assets and financial liabilities:

	Financial Assets Current Year	Fair Value Through Profit and Loss	Loans and Receivables	Shares Held in or Loans Advanced to Public Sector	2018-19
	Note	Note a	Note b	Note c	Total
Description		£m	£m	£m	£m
Voted loans	9a	-	6	3,284	3,290
NLF loans	9a	-	-	591	591
Housing loans	9a	218	-		218
Shared Equity Housing loans	9a	-	952		952
Energy related loans	9a	-	146		146
EU CAP funds	9a	-	256		256
Other Funds	9a	-	100		100
Student loans	9a	3,459	-		3,459
Interests in nationalised industries	9a	-	-	27	27
Trade receivables	11	-	55		55
Accrued income	11	-	749		749
Interest receivable	11	-	33		33
Amounts receivable from the SCF	11	-	-		-
Other receivables	11	-	85		85
Corporate balance with the SCF	11	-	-		-
Cash and cash equivalents	2	-	1,020		1,020
Total		3,677	3,402	3,902	10,981

Note: As not all assets are financial instruments, the above table excludes VAT £66m and prepayments £359m included in the associated asset note (Note 11).

Financial Assets Restated Prior Year	Note	Fair Value Through Profit and Loss Restated	Loans and Receivables Restated	Shares Held in or Loans Advanced to Public Sector	2017-18
		Note a	Note b	Note c	Total
Description		£m	£m	£m	£m
Voted loans	9a	-	5	3,064	3,069
NLF loans	9a	-	-	622	622
Housing loans	9a	191		-	191
Shared Equity Housing loans	9a		860		860
Energy related loans	9a		128	-	128
EU CAP funds	9a	-	323	-	323
Other Funds	9a	-	182	-	182
Student loans	9a	3,436	-	-	3,436
Interests in nationalised industries	9a	-	-	25	25
Trade receivables	11	-	66	-	66
Accrued income	11	-	703	-	703
Interest receivable	11	-	33	-	33
Amounts receivable from the SCF	11	-	141	-	141
Other receivables	11	-	91	-	91
Corporate balance with the SCF	11	-	1	-	1
Cash and cash equivalents	2	-	585	-	585
Total		3,627	3,118	3,711	10,456

Note: As not all assets are financial instruments, the above table excludes VAT £60m and prepayments £342m included in the associated asset note (Note 11).

Financial Liabilities Current Year	Note	Fair Value Through Profit and Loss	All Other Financial Liabilities	Shares Held in or Loans Advanced to the Public Sector	2018-19
		Note a	Note d	Note c	Total
Description		£m	£m	£m	£m
Trade payables	12		504		504
Accruals	12		1,563		1,563
Other payables	12		443		443
NLF loans	12			591	591
Accrued Interest due on NLF Loans	12			8	8
Balances payable to the SCF	12		24		24
Corporate balance with SCF	12		979		979
PFI Imputed finance leases	12		3,115		3,115
Lease payables	12		23		23
Bank overdraft	12		-		-
Financial guarantees	12		-		-
Total		-	6,651	599	7,250

Note: As not all liabilities are financial instruments, the above table excludes deferred income £132m, other tax and social security £146m, superannuation payable £102m and employee benefit accrual £68m included in the associated liability note (note 12). The finance leases are disclosed at the discounted cash flow value.

Financial Liabilities Prior year	Note	Fair Value Through Profit and Loss	All Other Financial Liabilities	Shares Held in or Loans Advanced to the Public Sector	2017-18
		Note a	Note d	Note c	Total
Description		£m	£m	£m	£m
Trade payables	12	-	449	-	449
Accruals	12	-	1,622	-	1,622
Other payables	12	-	411	-	411
NLF loans	12	-	-	622	622
Accrued Interest due on NLF Loans	12	-	-	9	9
Corporate balance with SCF	12	-	585	-	585
PFI Imputed finance leases	12	-	2,988	-	2,988
Lease payables	12	-	25	-	25
Financial guarantees	12	-	18	-	18
Total		-	6,100	631	6,731

Note: As not all liabilities are financial instruments, the above table excludes deferred income £130m, other tax and social security £139m, superannuation payable £99m and employee benefit accrual £61m included in the associated liability note (note 12). The finance leases are disclosed at the discounted cash flow value.

Note a: Assets and liabilities held at fair value through the profit and loss are measured at fair value with gains or losses being accounted for through the outturn statement.

Note b: Loans and receivables are measured at amortised cost using the effective interest methods, and any impairment losses go through the outturn statement. Disposal may give rise to a gain or loss, which is recognised through the outturn statement.

Note c: Shares held in or loans advanced to public sector or due to the NLF are held at historic cost less impairment, and any impairment losses go to the outturn statement.

Note d: All other financial liabilities will be measured at fair value initially and subsequently at amortised cost.

The fair value of financial instruments is equivalent to the carrying value disclosed in the financial statements. No financial assets or financial liabilities have been offset and presented net in these accounts.