The Governance Statement sets out the British Council’s approach to managing its main financial risks. In addition, the British Council is required to make the following disclosures under the UK Financial Reporting Standard 29.
The categories of financial instruments held within the British Council are:
• Loans and receivables: the British Council values receivables initially at fair value and subsequently at amortised cost. The British Council does not intend to trade receivables and currently holds no loans.
• Assets available for sale: the only assets that the British Council holds under this category are cash and short-term investments as described below. These are stated in the
accounts at fair value.
• Financial liabilities: the British Council’s policy is that short-term creditors are recorded at carrying value and long-term creditors are reflected at amortised costs where reasonable timescales exist over which to discount and where this is materially different from carrying value.
• Financial assets and liabilities at fair value through profit or loss: the British Council uses forward foreign exchange contracts to reduce exposure to movements in exchange rates. These contracts are carried at fair value, and any gains or losses in fair value are recognised in the statement of financial activities.
Credit risk
The British council is exposed to credit risk on trade debtors over 120 days of £4.9 million (2012 –13: £3.8 million). Of this £4.9 million, £1.7 million relate to debts from the Syrian Ministry of Higher Education and a specific provision of £1.7 million has been made for the entire debt. The remainder of these debts relate to European Union and Middle Eastern projects on which the British Council is protected from financial risk provided criteria are met. In addition, experience in many overseas regions demonstrates that aged debts in this timeframe remain valid and collectable.
Bad and doubtful debts are provided for on an individual basis. Write-offs in the year for bad debts amounted to £1,562,019 (£589,306 in 2012 –13).
Counterparty credit limits, which take published credit ratings and other factors into account, are set to cover the investment exposure to individual financial institutions. Exposures and limits applicable to each financial institution are reviewed on a regular basis. The British Council has not suffered any loss in relation to cash held by its banks. Similar counterparty credit limits apply to banks with respect to forward foreign exchange contracts.
of the British Council. The remainder is funded through fees and income from services and competitively tendered contracts.
Any liquidity risk is minimal, as overseas current account balances are generally maintained at five weeks’ working capital requirement to ensure sufficient cash for operational activities. Surplus cash is repatriated to the UK where local foreign exchange controls permit, and invested in the UK. Otherwise, surplus funds are invested overseas.
All investments are in accordance with the British Council’s investment policy. Non-restricted cash is held on short-term deposit accounts or money market deposits with a maturity of not more than 12 months at market rates. The British Council is therefore securing interest returns on cash holdings largely held in the UK on a short-term basis. Surplus funds which cannot be repatriated to the UK (due to local foreign exchange controls) are currently invested for periods up to six months.
The British Council, as at 31 March 2014, held cash and short-term deposits amounting to £253 million (2012 –13: £258 million), of which £109 million (2012 –13: £122 million) was held in sterling, £48 million (2012 –13: £46 million) was held in euros and £5 million (2012 –13: £4 million) was held in US dollars. Other currency holdings amounted to £91 million (2012 –13: £86 million). Of the total cash and short-term deposit balances of £253 million (2012 –13: £258 million), £99 million or 39 per cent (2012 –13: £87 million or 34 per cent) was held in overseas bank accounts of which £83 million (2012 –13: £74 million) was held with banks incorporated in the UK and regulated by the Prudential Regulation Authority, £16 million (2012 –13: £13 million), was held with overseas banks outside the UK bank portfolio. Counterparty risks relating to our banks’ holding balances overseas are reviewed regularly and 97 per cent of all funds are held with banks with an S&P short-term deposit rating of A1 or greater.
At 31 March 2014, total interest income amounted to £2.6 million (2012 –13: £2.9 million), of which £1.2 million (2012 –13: £1.6 million) was earned in the UK and the balance of £1.4 million (2012 –13: £1.3 million) attributable to cash invested overseas.
Currency risk
The British Council operates in over 100 countries and carries out transactions in sterling, US dollars, euros and a variety of local currencies.
The British Council manages its exposure to foreign currency risk on cash balances by limiting operational funding balances in local currency bank accounts where possible to no more than working capital requirements. Where countries have deregulated foreign exchange controls any excess funds over and above working capital requirements are repatriated to the UK and then invested and/or held in convertible hard currency accounts. The British Council operates a foreign exchange forward hedging programme to cover up to 80 per cent of euro and US dollar exposures, the objective being to assist in achieving budget certainty. The British Council’s current US dollar and euro exposures are limited by significant natural hedges and as a result, the British Council held no open euro or US dollar forward foreign exchange contracts as at 31 March 2014.
Cash held overseas and considered to be trapped due to foreign exchange controls amounted to a sterling equivalent of £16 million (2012 –13: £15 million) as at 31 March 2014. The British Council is actively seeking ways to manage and limit the effect of foreign exchange gains and losses on cash balances held in those currencies.
In 2013 –14, the British Council also used forward foreign exchange contracts to manage its exposure to the Indian rupee by mitigating the effect of unfavourable exchange rate movements. At 31 March 2014, the fair value of the forward foreign exchange contracts held was £0.1 million. All expire within 12 months of the Balance Sheet date.