Icelandic Bank impairment adjustment post approval of statement of accounts 2008/09 in June 2009

Report: 8
Date: 17 September 2009
By: Treasurer and Director of Resources on behalf of the Commissioner

Summary

The report requests the Committee’s approval to transfer an additional £2.8m from reserves to fund an additional adjustment in the 2008/09 Statement of Accounts, in respect of the potential level of recovery of Icelandic bank debt.

A. Recommendation

That the Committee approve the proposed impairment adjustment to the Statement of Accounts 2008/09 and consequent reduction in reserves.

B. Supporting information

1. In October 2008 a number of the Icelandic banks collapsed and subsequently went into administration. The Authority had deposited £30 million as short term investments with Landsbanki Island hf. bank with varying maturity dates and interest rates as follows:

• £10 million at 6.7% for one year
• £20 million at 5.98% for one month

2. Landsbanki Island hf. went into administration under Icelandic law in 2008.

3. CIPFA issued guidance on the treatment for Icelandic bank deposits in the accounts of local authorities on 13 May (LAAP 82). The document recommended the level of impairment for the MPA’s deposits with Landsbanki and the basis of repayment to the MPA in future years.

4. While the paper stated that it was up to the ‘responsible finance officer’ to determine the appropriate level of impairment, the amount recommended was 5%. This was based on legal advice that local authorities rank as a priority creditor. However it was made clear that this recommendation would be updated in September 2009 with more up to date information in terms of amounts and timescale of repayment of debt.

5. Following the original CIPFA guidance, an impairment loss of 5% was recognised in the Income and Expenditure Account as part of the Statement of Accounts for 2008/09 presented to the meeting of the full Authority on 25 June 2009.

6. A revised LAAP 82 was issued in early September providing more recent information on the likely level of recovery of the MPA debt from Landsbanki Island hf. This report identified that a lower level of recovery than previously mentioned would need to be recorded in the accounts, which resulted in 17% impairment up from 5%, as previously recorded. The Authority is required to reflect this higher level of impairment in order to comply with CIPFA requirements as specified in LAAP82. The additional impairment amount by which the Income and Expenditure Account needs to be adjusted is £2.8million.

7. Approval is, therefore, sought to fund this adjustment from reserves.

C. Race and equality impact

There are no race and equality implications arising from this report.

D. Financial implications

As reported to the Finance and Resources and the Corporate Governance Committees in June the 2008/09 draft accounts show a general reserve of £47.7m. The proposed impairment would reduce this reserve to £47.5m. The impairment sum of £2.8 million is proposed to be funded from the Financial Instrument Adjustment Account (£1.1 million) and from additional interest due on this debt (£1.5 million, following guidance from the revised LAAP 82) with the balance (£0.2 million) coming from the general reserve. This would reduce the revenue surplus for the year from £0.907 million to £0.701 million The general reserve, together with the uncommitted emergencies contingency reserve of £23.1m, now totals £70.6m which is 2.7% of net budgeted expenditure and remains in line with Authority policy of maintaining a general reserve (including the emergencies contingency reserve) of at least 2% of Net Revenue Expenditure.

E. Background papers

• None

F. Contact details

Report author: Annabel Adams

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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