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Perceived Risks

The quotations that follow are from the RCT Homes 2012/2013 Group financial statements:

During 2012 the group risk map was developed to ensure it has a greater strategic focus. It identifies the following risks and challenges to the Group:

• Welfare Reform – As previously stated the changes proposed to welfare benefits will significantly change the UK housing sector and will place increased financial pressure on tenants and subsequently us. Direct payments to tenants increase the risk of our bad debt provision increasing and we will need to find innovative ways to keep cash collection rates at an acceptable level.

• Rent Restructure – The consultation document issued by Welsh Government in 2011 indicated that our rent envelope is lower than the current average rents charged across the borough, resulting in lower rent increases than those currently included in the business plan. The implementation of the new regime has been delayed until April 2014. This risk coupled with Welfare Reform has the potential to have a major impact on the rental income of the Group.

• Sheltered Remodelling Programme – As the project continues we need to ensure specifications are clear and build costs remain within budget. We need to ensure the preferred models are future proofed and fit for purpose whilst at the same time ensuring value for money. Active financial management, planning, and tenant input will be key to the success of this project.

• Impact on New Build to the Group – We currently have permission to pilot 200 properties through the framework operated by Porthcwlis. Any further increase in volumes will need consent from our funders.

• Expansion of Homeforce – As Homeforce expands into new work streams and begins to operate outside of the Group, we need to ensure growth is manageable in terms of resources and working capital. Asset investment will need to be closely managed to ensure cash does not become over committed and profitability on contracts is maintained.

• Long-Term Financial Viability of GrEW – Work is in progress to reduce costs within GrEW and expand its customer base to make the business more financially secure. During this time Meadow Prospect will continue to support its subsidiary.

The summarized financial statements of RCT Homes for the previous five years are presented in Exhibit 8.4.

RCT Homes entered into a value-added tax (VAT)[1] shelter coincident with the date of transfer of the housing stock, to carry out an agreed schedule of refurbishment works to the properties. The value of these works was £359 million. The cost to the borough council of contracting for these works to be undertaken was offset

Exhibit 8.4 Financial Performance of RCT Homes

Panel A: Income and Expenditure Account

Income and expenditure account (£ million)

2013

2012

2011

2010

2009

Turnover

45.9

44.6

43.6

40.0

36.6

Operating costs

(33.0)

(38.5)

(29.6)

(28.0)

(27.1)

Operating surplus

12.9

6.1

14.0

12.0

9.5

Net interest charge

(1.4)

(0.5)

(0.0)

(0.5)

0.3

Surplus on disposal of assets

0.5

0.4

0.5

0.5

1.8

Actuarial (loss) on pension scheme

(0.1)

(3.8)

(4.0)

(1.3)

(6.2)

Surplus for the year after tax

11.9

2.2

10.4

10.7

5.4

Panel B: Balance Sheet

Balance sheet (£ million)

2013

2012

2011

2010

2009

Housing properties at cost less depreciation and grant

96.6

75.1

46.4

27.7

11.8

Other tangible fixed assets and investments

1.3

1.6

1.9

2.3

2.5

Net current assets/(liabilities)

(0.8)

(1.8)

1.6

(10.6)

(7.6)

97.1

74.9

49.9

19.4

6.7

Loans due after one year

(47.0)

(37.0)

(18.0)

(5.0)

(3.0)

Other long-term liabilities (pensions)

(7.2)

(6.8)

(3.1)

0.0

0.0

Net assets

42.9

31.1

28.8

14.4

3.7

Panel C: Cash Flow Statement

Cash flow statement (£ million)

2013

2012

Net cash inflow from operating activities

16.3

9.9

Interest paid /received Capital expenditure

(1.5)

(1.0)

Improvement works on properties

(27.0)

(33.1)

Social housing and other grants

1.6

3.7

Purchase of other assets

(0.3)

(0.3)

Sale of fixed assets

0.5

0.5

Subtotal

(25.2)

(29.2)

Cash outflow before financing

(10.4)

(20.2)

Loans advances received

10.0

19.0

(Decrease) in cash and cash equivalents

(0.4)

(1.2)

against an equal increase in the purchase price of the stock paid to the borough council by RCT Homes. This transaction is not reflected in the financial statements in accordance with Financial Reporting Council (FRS) 5,[2] reporting the substance of transactions over the legal form. The works contracted are to be carried out over an envisaged 15-year period and are being recognized as they are undertaken, in accordance with the accounting policy for major, cyclical, and responsive repairs. In the event RCT Homes does not complete the work specified, the development agreement may be terminated at no financial loss to RCT Homes.

At April 2013, it was envisaged that there will be a further £136 million of expenditure under the remaining nine years of the VAT shelter.

  • [1] A value-added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for itself to offset the taxes it had previously paid on the inputs, see HM Revenue & Customs: Introduction to VAT, hmrc.gov.uk/vat/start/introduction.htm.
  • [2] FRS 5 addresses the problem of what is commonly referred to as off-balance-sheet financing. One of the main aims of such arrangements is to finance a company's assets and operations in such a way that the finance is not shown as a liability in the company's balance sheet. A further effect is that the assets being financed are excluded from the accounts, with the result that both the resources of the entity and its financing are understated. Source: Financial Reporting Council.
 
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