The Scottish Government Consolidated Accounts for the year ended 31 March 2018

10. Financial Instruments

The Scottish Government measures and presents financial instruments in accordance with International Accounting Standard (IAS) 32, IAS 39 and International Financial Reporting Standard (IFRS) 7 as interpreted by the Financial Reporting Manual. International Financial Reporting Standard (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	2017-18Total	2016-17 Total
	£m	£m	£m	£m	£m	£m
Trade payables	449	-	-	-	449	444
Accruals	1,599	23	-	-	1,622	1,414
Other payables	182	229	-	-	411	375
NLF loans	31	27	115	449	622	652
Accrued Interest due on NLF Loans	9	-	-	-	9	9
Corporate balance with SCF	585	-	-	-	585	625
PFI Imputed finance leases	64	69	226	2,629	2,988	2,784
Lease payables	1	2	5	17	25	27
Bank overdraft	2	-	-	-	2	-
Financial guarantees	2	2	6	8	18	21
Total	2,924	352	352	3,103	6,731	6,351

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 (= amortised cost).

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

66% (2016-17: 64%) of the Scottish Government's financial assets and 100% (2016-17: 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 2007-13 European Structural Funds (ESF) programme. The year end balance of £36.803m is the sterling equivalent of €42.066m translated at the accounting date (at the official EU exchange rate at 31 March 2018).

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 £861m (2016-17: £749m).

Categories of financial assets and financial liabilities

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

Financial Assets - Current Year

Description	Note	Fair Value Through Profit and Loss	Loans and Receivables	Shares Held in or Loans Advanced to Public Sector	2017-18 Total
		Note a	Note b	Note c
		£m	£m	£m	£m
Voted loans	9a	-	5	3,064	3,069
NLF loans	9a	-	-	622	622
Housing loans	9a	861	190	-	1,051
Energy related loans	9a		128	-	128
EU CAP funds	9a	-	323	-	323
Other Funds	9a	-	182	-	182
Student loans	9a	-	3,691	-	3,691
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		861	6,139	3,711	10,711

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 Assets - Prior Year

Description	Note	Fair Value Through Profit and Loss	Restated Loans and Receivables	Shares Held in or Loans Advanced to Public Sector	2016-17 Total
		Note a	Note b	Note c
		£m	£m	£m	£m
Voted loans	9a	-	6	2,841	2,847
NLF loans	9a	-	-	652	652
Housing association loans	9a	-	61	-	61
Shared Equity Housing	9a	749	-	-	749
Other Housing Loans	9a	-	44	-	44
Other Funds	9a	-	466	-	466
Student loans	9a	-	3,257	-	3,257
Interests in nationalised industries	9a	-	-	25	25
Trade receivables	11	-	54	-	54
Accrued income	11	-	497	-	497
Interest receivable	11	-	30	-	30
Amounts receivable from the SCF	11	-	298	-	298
Other receivables	11	-	88	-	88
Cash and cash equivalents	2	-	625	-	625
Total		749	5,426	3,518	9,693

Note: As not all assets are financial instruments, the above table excludes VAT £58m and prepayments £252m included in the associated asset note (Note 11).

Financial Liabilities - Current Year

Description	Note	Fair Value Through Profit and Loss	Loans and Receivables	Shares Held in or Loans Advanced to Public Sector	2017-18 Total
		Note a	Note b	Note c
		£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
Bank overdraft	12	-	2	-	2
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.

Financial Liabilities - Prior year

Description	Note	Fair Value Through Profit and Loss	Restated Loans and Receivables	Shares Held in or Loans Advanced to Public Sector	2016-17 Total
		Note a	Note b	Note c
		£m	£m	£m	£m
Trade payables	12	-	444	-	444
Accruals	12	-	1,414	-	1,414
Other payables	12	-	375	-	375
NLF loans	12	-	-	652	652
Accrued Interest due on NLF Loans	12	-	-	9	9
Corporate balance with SCF	12	-	625	-	625
PFI Imputed finance leases	12	-	2,784	-	2,784
Lease payables	12	-	27	-	27
Financial guarantees	12	-	21	-	21
Total		-	5,690	661	6,351

Note: As not all liabilities are financial instruments, the above table excludes deferred income £98m, other tax and social security £131m, superannuation payable £97m and employee benefit accrual £58m 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.