Communities and Local Government CommitteeExtract from Hyde Housing Association Financial Statement 2012–13, p13:

“In July 2010 the Group issued a listed bond. As a result of this listing the Group was obliged to adopt financial reporting standards—FRS 26 “Financial Instruments: Recognition and Measurement” and FRS 29 “Financial Instruments: Disclosures”.

The main impact of this accounting change was that the Group’s derivative transactions (primarily interest rate swaps) must be accounted for at market value. All derivative contracts are entered into in line with the group hedging policy which allows the Group to manage interest rate and other risks.

As noted in the Treasury section below, the Group has a Board approved Treasury Policy which requires us to ensure that we have between 70–95% of our borrowing at fixed rates at any one time. This provides increased certainty of cash flows (both current and future) for the Group’s financial assets and liabilities.

The Group achieves this mix of fixed/floating rate debt by either entering into fixed rate loans or by entering into variable rate loans and then entering into derivative instruments (interest rate swaps) to switch from variable to fixed rate lending. These derivatives are held for the long term in order to provide long term certainty to our cash flows. They are not actively traded by the Group and the Group did not enter into any new interest rate swaps during the course of the year.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged.

Due to limitations on the application of hedge accounting, volatility has been introduced into the Income and Expenditure Statement as market value movements are not fully offset by movements in the underlying hedged item within each period. There is no cash flow impact to the Group’s results as a result of adopting FRS 26.

Given that the reasons for entering into the derivatives remain commercially sound (ie they are intended to be held to maturity in order to reduce volatility in the Group’s cash flows), the Group has opted to report the underlying result of the Group before reflecting the impact of these accounting standards.

This approach reflects the manner in which the Group manages its risks. It is supported by funders of the Group who, where applicable, have agreed to amend lending covenants to exclude the impact of these accounting standards in recognition of the fact that the Group’s ongoing cash flows are not impacted and hence there is no change in the ability of the Group to continue to service its debt.

The inclusion of this accounting volatility decreases the reported 2013 surplus by £27.7 million (2012: £56.4 million). The large movement in value this year reflects the reduction in applicable long term interest rates during 201213. The impact on the prior year was more marked as interest rates were more volatile in that period. As and when long term interest rates increase, these accounting losses will reverse. They will also reverse as and when the applicable swaps reach their maturity. Commentary provided in the Report of the Board and Operating and Financial Review focuses on the Group’s underlying performance, unless otherwise stated.”

[Extract Ends]