Annual report 2020/21: Financial statements, accessible version

[*]
[**]Group statement of comprehensive net expenditure – Year ended 31 March 2021[***]

All activities above derive from continuing operations. Net expenditure is financed by Grant-in-Aid as explained in accounting policy Note 1e, with the exception of non-cash expenditure, for example depreciation, amortisation, provisions and impairments.

[*] Impairment/(impairment reversal) of financial assets was disclosed as a single line in prior years, but has been split out in 2020/21 between assets held at FVTPL and assets held at amortised cost to provide increased transparency regarding the source of impairments.

Group statement of financial position – At 31 March 2021[***]

	Note	2020/21 £’000	2019/20 £’000
Non-current assets
Intangible assets		2,355	2,412
Property, plant and equipment		6,690	11,174
Investments in associates and joint ventures	13b	45,732	70,936
Pension assets	22a	155,335	94,438
Trade and other receivables	14b	224,120	201,048
Financial assets held at amortised cost	14c	1,012,875	825,392
Financial assets held at FVTPL	14c	17,701,316	14,704,755
		19,148,423	15,910,155
Current assets
Non-current assets held for sale		2,250	–
Land and property assets	18	1,110,886	998,074
Trade and other receivables	14b	319,576	98,041
Financial assets held at amortised cost	14c	485,068	550,946
Financial assets held at FVTPL	14c	229,008	142,787
Cash and cash equivalents	14a	262,541	218,868
		2,409,329	2,008,716
Total assets		21,557,752	17,918,871
Current liabilities
Trade and other payables	19	(632,273)	(426,167)
Provisions	20	(1,372)	(234)
		(633,645)	(426,401)
Non-current assets plus net current assets		20,924,107	17,492,470
Non-current liabilities
Trade and other payables	19	(95,718)	(115,828)
Provisions	20	(19,270)	(12,455)
Pension liabilities	22a	(36,325)	(7,478)
		(151,313)	(135,761)
Assets less liabilities		20,772,794	17,356,709
Reserves
Income and Expenditure Reserve		20,772,794	17,356,709
Taxpayers’ equity		20,772,794	17,356,709

The accompanying Notes are an integral part of these Financial Statements. Approved by the Board on 14 July 2021 and signed on their behalf by Gordon More, Interim Chief Executive and Accounting Officer

Agency statement of financial position – At 31 March 2021[***]

	Note	2020/21 £’000	2019/20 £’000
Non-current assets
Intangible assets		2,355	2,412
Property, plant and equipment		6,690	11,174
Investments in subsidiaries	13a	50,000	50,000
Investments in associates and joint ventures	13b	20,615	20,615
Pension assets	22a	155,335	94,438
Trade and other receivables	14b	224,120	201,048
Financial assets held at amortised cost	14c	1,012,875	825,392
Financial assets held at FVTPL	14c	17,701,316	14,704,755
		19,173,306	15,909,834
Current assets
Non-current assets held for sale		2,250	–
Land and property assets	18	1,110,886	998,074
Trade and other receivables	14b	319,576	98,041
Financial assets held at amortised cost	14c	485,068	550,946
Financial assets held at FVTPL	14c	229,008	142,787
Cash and cash equivalents	14a	262,541	218,868
		2,409,329	2,008,716
Total assets		21,582,635	17,918,550
Current liabilities
Trade and other payables	19	(662,563)	(433,896)
Provisions	20	(1,372)	(234)
		(663,935)	(434,130)
Non-current assets plus net current assets		20,918,700	17,484,420
Non-current liabilities
Trade and other payables	19	(95,718)	(115,828)
Provisions	20	(19,270)	(12,455)
Pension liabilities	22a	(36,325)	(7,478)
		(151,313)	(135,761)
Assets less liabilities		20,767,387	17,348,659
Reserves
Income and Expenditure Reserve		20,767,387	17,348,659
Taxpayers’ equity		20,767,387	17,348,659

The accompanying Notes are an integral part of these Financial Statements. Approved by the Board on 14 July 2021 and signed on their behalf b: Gordon More, Interim Chief Executive and Accounting Officer.

Statement of cash flows – Year ended 31 March 2021[***]

Group and Agency	Note	2020/21 £’000	2019/20 £’000
Net cash outflow from operating activities	a)	(4,722,510)	(4,502,855)
Cash flows from investing activities
Purchase of property, plant and equipment		(2,921)	(5,214)
Disposal of property, plant and equipment		21	–
Purchase of intangible assets		(1,631)	(1,395)
Investment made in group companies	13b	23,531	(19,080)
Net cash outflow from investing activities		18,999	(25,689)
Cash flows from financing activities
Grant-in-Aid from sponsor department	SoCTE [*]	4,747,183	4,480,586
Net cash inflow from financing activities		4,747,183	4,480,586
Increase/(decrease) in cash and cash equivalents in the period		43,673	(47,958)
Cash and cash equivalents at 1 April	14a	218,868	266,826
Cash and cash equivalents at 31 March	14a	262,541	218,868

a) Reconciliation of net operating expenditure to net cash flow from operating activities

[*] SoCTE: Statement of Changes in Taxpayers’ Equity

[**] SoCNE: Statement of Consolidated Net Expenditure

Group statement of changes in taxpayers’ equity – Year ended 31 March 2021[***]

	Note	Income and expenditure £’000	Total reserves £’000
Balance at 1 April 2019		14,194,233	14,194,233
Changes in taxpayers’ equity 2019/20
Net expenditure for the year		(1,313,994)	(1,313,994)
Actuarial loss from pension fund	22e	(4,959)	(4,959)
Income tax on items in other comprehensive expenditure	12b	843	843
Total comprehensive expenditure for the year		(1,318,110)	(1,318,110)
Grant-in-Aid from sponsor department	1e	4,480,586	4,480,586
Balance at 31 March 2020		17,356,709	17,356,709
Changes in taxpayers’ equity 2020/21
Balance at 1 April 2020		17,356,709	17,356,709
Net expenditure for the year		(1,352,123)	(1,352,123)
Actuarial gain from pension fund	22e	25,957	25,957
Income tax on items in other comprehensive expenditure	12b	(4,932)	(4,932)
Total comprehensive expenditure for the year		(1,331,098)	(1,331,098)
Grant-in-Aid from sponsor department	1e	4,747,183	4,747,183
Balance at 31 March 2021		20,772,794	20,772,794

Agency statement of changes in taxpayers’ equity – Year ended 31 March 2021[***]

	Note	Income and expenditure reserve £’000	Total reserves £’000
Balance at 1 April 2019		14,190,620	14,190,620
Changes in taxpayers’ equity 2019/20
Net expenditure for the year		(1,318,431)	(1,318,431)
Actuarial loss from pension fund	22e	(4,959)	(4,959)
Income tax on items in other comprehensive expenditure	12b	843	843
Total comprehensive expenditure for the year		(1,322,547)	(1,322,547)
Grant-in-Aid from sponsor department	1e	4,480,586	4,480,586
Balance at 31 March 2020		17,348,659	17,348,659
Changes in taxpayers’ equity 2020/21
Balance at 1 April 2020		17,348,659	17,348,659
Net expenditure for the year		(1,349,480)	(1,349,480)
Actuarial gain from pension fund	22e	25,957	25,957
Income tax on items in other comprehensive expenditure	12b	(4,932)	(4,932)
Total comprehensive expenditure for the year		(1,328,455)	(1,328,455)
Grant-in-Aid from sponsor department	1e	4,747,183	4,747,183
Balance at 31 March 2021		20,767,387	20,767,387

Notes to the financial statements year ended 31 March 2021[***]

1 Statement of accounting policies

a) Statutory basis

The Homes and Communities Agency, trading as Homes England (hereafter, the Agency), is an executive non-departmental public body (NDPB) and statutory corporation created by the Housing and Regeneration Act 2008 (as amended by the Localism Act 2011). Homes England is sponsored by the Ministry of Housing, Communities and Local Government (MHCLG).

The Financial Statements of Homes England are governed under the provisions of the Housing and Regeneration Act 2008 and by the Accounts Direction given by the Secretary of State, with approval of HM Treasury under the Act. The Direction issued on 8 December 2014 reflects Government policy that the Financial Statements should, insofar as appropriate, conform to the accounting and disclosure requirements contained in Managing Public Money, FReM and in HM Treasury’s Fees and Charges Guide. The Financial Statements have been prepared in accordance with the 2020/21 FReM issued by HM Treasury.

The accounting policies contained in the FReM apply International Financial Reporting Standards (IFRS) as adapted or interpreted for the public sector context. Where the FReM permits a choice of accounting policy, the accounting policy which is judged to be most appropriate to the particular circumstances of the Agency for the purpose of giving a true and fair view has been selected. The policies adopted by the Agency are described below. They have been applied consistently in dealing with items that are considered material to the Agency’s accounts.

b) Accounting convention

The Financial Statements are prepared under the historical cost convention modified by the revaluation of financial assets held at Fair Value Through Profit of Loss (FVTPL) and property, plant and equipment.

c) Basis of preparation and consolidation

The Group Financial Statements incorporate those of the Agency and the investees controlled by the Agency. No Statement of Comprehensive Net Expenditure is presented for the Agency as permitted by section 408 of the Companies Act 2006.

No significant judgements or assumptions have been made relating to the determination of investee status, joint control, or significant influence. The Group’s associated undertakings are all undertakings in which the Group has a participating interest and over whose operating and financial policy it exercises significant influence. The Group’s joint ventures are all undertakings in which the Group exercises joint control. In the Group Financial Statements, investments in associates and joint ventures are accounted for using the equity method, wherein an investment is initially recorded at cost and subsequently adjusted to reflect the investor’s share of the net assets of the associate. The consolidated Statement of Comprehensive Net Expenditure includes the Group’s share of profits and losses of associates and joint ventures, while its share of net assets of associates and joint ventures is shown in the Group Statement of Financial Position. T

The share of net assets and profit information is based on unaudited financial statements or management information to 31 March 2021 for most associates. Where this information is not available, financial statements with a different reporting date have been used, where this reporting date is within three months of that of the Agency and where this does not produce significantly different results. Adjustments have been made on consolidation for significant transactions following the reporting date of the information used.

English Cities Fund Limited Partnership prepares its annual financial statements up to 31 December, the same reporting date as its investee partner.

Countryside Maritime Limited prepares its annual financial statements up to 30 September, which is the reporting date of the joint venture partner.

Kier Community Living LLP prepares its annual financial statements up to 30 June, which is the reporting date of the joint venture partner.

d) Investments in subsidiaries, associates and joint ventures

Investments in subsidiaries, associates and joint ventures, as recorded in the Agency’s own Statement of Financial Position, are accounted for at cost (subject to annual assessment for impairment).

e) Funding

The Agency’s activities are funded in part by income generated from operations. However, the majority of the Agency’s funding is Grantin-Aid provided by the Ministry of Housing, Communities and Local Government for specified types of expenditure.

Grant-in-Aid received to finance activities and expenditure which support the statutory and other objectives of the Agency is treated as financing and credited to the income and expenditure reserve in full, because it is regarded as a contribution from a controlling party. The net expenditure for the period is transferred to this reserve.

f) Critical accounting judgements and key sources of estimation uncertainty

COVID-19

As at 31 March 2021 there remains significant uncertainty over the short and medium-term future as a result of the ongoing COVID-19 pandemic. The Agency’s consideration of the effects of changes to market conditions on critical accounting judgements and key sources of estimation uncertainty as a result of the pandemic are set out in Note 2. Impact of COVID-19.

UK withdrawal from the EU and future trading relationship

As of 1st January 2021, Trade and Cooperation Agreement, signed between the United Kingdom and the European Union has come into effect. This has reduced the macro-economic uncertainty surrounding the UK’s withdrawal from the EU, however, there remains areas of material uncertainty, such as the pending agreement on financial services which could still impact the UK housing market.

Financial assets measured at fair value

Where assets are to be measured at fair value, this is performed with reference to the requirements of International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13), applying considerations which follow the three hierarchies set out under the standard for determining fair value.

The majority of financial assets measured at fair value are investments in homes, such as those under the Help to Buy scheme, as analysed in Note 14d. These assets are valued with reference to regional house price indices, supplemented by adjustments for the Agency’s experience of actual disposals since the inception of the schemes. These adjustments are required as house price indices are based on all market activity whereas Help to Buy is only available on new build properties purchased with a mortgage, and redemptions can occur via staircasing as well as by sale. Together, these provide a reasonable estimate of the fair value of these assets because house price indices alone cannot accurately predict the value of individual homes; and disposal proceeds to date, although a good indicator of market performance, may not occur at the same level in the future. The adjustments have a significant effect on the fair value because they modify the expected market price of properties from which Homes England’s percentage share is calculated. Further details are provided in Note 17a).

The valuation of investments in homes (through equity-loan programmes such as Help to Buy) is highly sensitive to changes in assumptions about market prices. Investments in homes are also the Agency’s most significant asset category so the judgement exercised by management, both in the application of indexation to the home equity portfolio and in the experience adjustments applied to this indexation, is a source of material estimation uncertainty in the Agency’s financial statements.

Analysis showing the sensitivity of the valuation of these assets to changes in market prices, and therefore to management’s judgement in estimating this valuation, is shown in Note 16a. In addition, Note 2 sets out valuation judgements made by the Agency in response to the COVID-19 pandemic and Note 17a outlines the Agency’s analysis of the sensitivity of the valuation of the Help to Buy portfolio to key modelling assumptions. Varying the chosen modelling assumptions within possible bounds generates a spread in estimated fair value of £1.85bn at current market prices. The majority of this spread results from applying market adjustments that are between 2% lower and 2% higher than the base assumption and assuming transactions are 100% sales or 100% staircasing.

Other financial assets measured at fair value are generally valued with reference to cash flow forecasts, which are by their nature based on estimates, with the exception of the Agency’s investment in the PRS REIT plc, which is valued with reference to quoted unit prices on the London Stock Exchange, and the Agency’s investment into an unlisted shared ownership fund managed by M&G Real Estate which is measured using Net Asset Values (NAV).

More information on the Agency’s application of IFRS 13 to support fair value measurement is set out in Note 14c and Note 15.

Expected Credit Losses

The Agency is required to calculate an Expected Credit Loss Allowance for Financial Assets measured at Amortised Cost. The majority of the assets the Agency measures at Amortised Cost relate to funding the Agency has provided as loans, and a small number of Non-Current Trade Receivables. The Agency also calculates a Simplified Expected Credit Loss Allowance for Current Trade Receivables as permitted under IFRS 9.

The Expected Credit Loss Allowance at 31 March 2021 is analysed in Note 14h. There are various key assumptions applied to the Expected Credit Loss model to which the calculation is highly sensitive, therefore the assumptions applied are a key judgement of management.

The key assumptions applied are as follows:

• Probability of Default: Probability of Default values are determined with reference to current economic conditions, notably with reference to the ongoing COVID-19 pandemic and the United Kingdom’s departure from the European Union. The Probability of Default values are applied to each investment in relation to their individual Credit Risk Rating.
• Economic Scenarios and relative Weightings: The Standard requires the Agency to consider alternative economic scenarios in the calculation of the Expected Credit Loss Allowance, these scenarios consist of an upside, downside, and base case (for further details of the scenarios see Note 2). For each identified scenario, variations are made to the Probability of Default values applied based on an individual investment’s Credit Risk Rating. The amount of change applied is dependent on the scenario. Weightings are applied to the Expected Credit Loss calculations for each scenario, determined in relation to the Agency’s view of the probability of each scenario occurring, with reference to current market and credit risk expectations.
• Loss Given Default (LGD) Floor: The Agency has determined that available historic default data is insufficient to provide an evidence base for anticipated losses on default. As a result, a minimum percentage value has been applied to the LGD calculation with reference to individual investments. This floor has been derived on the basis of management judgement and interpretation of Prudential Regulation Authority guidance. At 1 April 2020 and 31 March 2021, the LGD floor applied was 35%.
• Moderated Security Values (MSVs): To reflect the expected value which might reasonably be realised from the sale of security in the event of default, Moderated Security Value (MSV) percentages are applied to gross security values to determine a measure of Loss Given Default (when compared against the estimated exposure on default). The MSVs are varied depending on the type of security held. A lower MSV percentage results in a higher discount applied to the determined security values.

Changes to the above assumptions can have a significant impact on the Expected Credit Loss Allowance calculation. A sensitivity analysis has been performed in relation to the above assumptions in Note 17b. Accounting judgements made by the Agency in response to the COVID-19 pandemic are set out in Note 2.

Note 14h provides an analysis of the movements in the Expected Credit Loss allowance between 1 April 2020 and 31 March 2021, including the impact of changes in Credit Risk assumptions over the period.

Valuation of land and property assets

The determination of the value of land and property assets involves a significant amount of judgement and estimation uncertainty, particularly given the complexity of some of the Agency’s properties and the range of anticipated routes to disposal. Valuations are performed by independent qualified valuation experts. The majority of land and property assets, by value, are assessed by these independent valuation specialists. However, as the assets are held under the historic cost convention, the judgement and estimation uncertainty involved in property valuations only affects carrying value where an impairment is identified.

Firms supporting the year end valuation exercise at 31 March 2020 were directed by the Royal Institute of Chartered Surveyors (RICS) to attach a ‘material valuation uncertainty’ comment to valuations in light of the COVID-19 pandemic and the difficulties they encountered in forming a judgement about valuations. This direction was removed during September 2020 and this remains the case at 31 March 2021. A summary of the accounting judgements made by the Agency in response to the COVID-19 pandemic is set out in Note 2.

Defined benefit pensions

The value of the Agency’s defined benefit pension assets and liabilities have been assessed by qualified independent actuaries. In making these assessments, it is necessary for actuarial assumptions to be used which include future rates of inflation, salary growth, discount rates and mortality rates. Differences between those estimates used and the actual outcomes will be reflected in taxpayers’ equity in future years.

Because assets managed under the Agency’s pension schemes are mainly in quoted investments, the pension assets stated at year-end are less susceptible to valuation uncertainty due to COVID-19 than other balances disclosed in the Agency’s Financial Statements. Of the £988.7m employer assets at 31 March 2021 disclosed in Note 22, only £55.4m (5.6%) was investment in property and is subject to the uncertainty outlined above in relation to the Agency’s land and property assets.

Similarly, the discount rates used for scheme liabilities are derived from bond markets and so are determined with reference to published figures. This means that COVID-19 did not create significant additional uncertainty for the calculation of the scheme liabilities as at 31 March 2021.

g) Grants

Payments of capital and revenue grants to Registered Providers of Social Housing (RPs) and other bodies are accounted for on an accruals basis.

Payments of Affordable Housing Grant may be paid in one, two or three instalments depending on scheme and provider eligibility: an acquisition tranche, a start on site tranche and a completion tranche. In the two years disclosed the tranches for schemes were as follows:

• 40% on acquisition (where eligible), 35% on start on site (where eligible; this tranche may increase to 75% if the scheme is not eligible for an acquisition payment), 25% on completion.
• Additionally, for those RPs who have been selected for continuous market engagement, payment flexibility of up to 95% against eligible expenditure can be claimed at acquisition and/or start on site.
• Affordable Housing grant under Strategic Housing Partnerships are paid quarterly in arrears, in line with total eligible development expenditure.

h) Grant recoveries

Recoveries of Affordable Housing Grant from Registered Providers of Social Housing (RPs) are accounted for when the amount due for repayment has been agreed with the RP and invoiced. RPs may retain grant recoverable from sales within their own accounts for recycling, with the funds becoming due back to the Agency if unused within three years. Recovery of other grants are accounted for when the repayment becomes contractually due. While judgement is involved in the calculation of the recoverable amount, this is not deemed to be material to the financial statements.

i) Revenue recognition

Homes England recognises revenue from its contracts with customers in line with IFRS 15.

Income from the disposal of land and property assets is recognised when there is a legally binding sale agreement, which has become unconditional and irrevocable by the end of the reporting period.

Income from rent and other property income is recognised over the period to which it relates, except for income from leases, which is accounted for as described in r) below. Income from homeowner fees is recognised in the period to which it relates. The fee accrues daily after the financial instrument reaches a defined maturity and the income is recognised to the extent that it has accrued at the reporting date.

Income from projects where the Agency acts as developer, where external contractors manage build and sales on behalf of the Agency, is recognised when a performance obligation in the contract is met. This is normally at legal completion and measured at the fair value of the consideration received or receivable for the property. Where income is based on a contract and recognised over time, it is recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by compliance inspector reports of work performed to date. A contract asset is recognised when the Agency has completed a proportion of the contract activity prior to payment being received. A contract liability is recognised where cash has been received in advance of the contract activity being completed.

j) Income tax

The income tax charge represents the sum of current tax and deferred tax. Both current and deferred tax are recognised in the Statement of Comprehensive Net Expenditure except to the extent that they relate to items recognised directly in taxpayers’ equity, in which case they are recognised in taxpayers’ equity.

Current tax is the expected tax payable on the taxable surplus for the year, based on tax rates that have been enacted or substantively enacted by the end of the reporting period, and any adjustment to tax payable in respect of previous years.

Deferred tax is the tax expected to be payable or recoverable in the future arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax is calculated at the tax rates expected to apply in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted by the end of the reporting period.

A deferred tax asset is recognised only to the extent that it is probable that future taxable surpluses will be available against which the temporary differences can be utilised.

k) Intangible assets

Intangible assets comprise:

• Software – licenses to use software developed by third parties.
• Information technology – the costs of developing the core systems of the Agency.

Assets are capitalised where the cost of a single asset, or group of assets, exceeds £5,000. Intangible assets are stated at historical cost less accumulated amortisation and accumulated impairment losses.

Intangible assets are amortised evenly over the expected useful life, including in the year of initial recognition, as follows:

• Software: over the licence period, typically between three and five years
• Information technology: four years, including the year of initial recognition

l) Property, plant and equipment

Plant and equipment are stated at historic cost less accumulated depreciation and impairment losses. Management views historic cost less depreciation to be a materially accurate approximation for fair value. Land and buildings are recognised initially at cost and thereafter measured at fair value, less depreciation on buildings. Land is not depreciated.

Assets under construction are carried at cost. They are reclassified when they are capable of being brought into use, and their cost is depreciated and revalued in the same way as other assets within their new classification.

Assets are capitalised where the cost of a single asset, or group of assets, exceeds £5,000. Depreciation is charged to net expenditure based on cost or fair value (in the case of revalued assets), less the estimated residual value of each asset, evenly over its expected useful life as follows (including in the year of initial recognition):

• Freehold and long leasehold property: 50 years, or the remaining lease term if shorter
• Information technology: three years
• Furniture, fixtures and fittings: five years
• Office equipment: five years

m) Land and property assets

Valuation

Land and property assets are shown in the Statement of Financial Position at the lower of cost and net realisable value. Cost comprises direct costs that have been incurred in bringing the land and property to their present location and condition, including the capitalisation of staff time where appropriate. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale including marketing, legal and panel solicitor fees. Net realisable value is an entity specific valuation methodology which reflects Homes England’s circumstances, the purpose for which the asset is held and the future disposal strategy for the asset. This is different from fair value methodology which is a marketbased measurement, and which establishes a value based on a price that would be received to sell an asset in an orderly transaction between market participants.

A net realisable value at each reporting period will be obtained for land and property assets if there is evidence of a change in net realisable value, brought about by certain trigger events and in all cases, where the net realisable value of the asset was more than or equal to £5m in the preceding year. Such trigger events include the receipt of planning permission, significant capital expenditure or a change in expected disposal strategy. If no trigger event occurs and the net realisable value of the asset was less than £5m in the preceding year, the asset will retain the net realisable value from the last assessment. However, during the year and in light of the potential for uncertainty arising from the COVID-19 pandemic, a decision was made at the outset of the valuation process that all assets with a net realisable value of £150,000 or more would require a valuation for the 2020/21 financial statements.

Where a trigger event occurs, an estimate of the net realisable value at the reporting period is obtained in accordance with the current edition of RICS Valuation – Professional Standards published by the Royal Institution of Chartered Surveyors. In establishing a net realisable for each asset, the following will be taken into account: there is a willing buyer and seller; the transaction is at arm’s length; each party has acted knowledgeably, prudently and without compulsion; the reasons for Homes England holding the asset and future disposal plans for the asset.

Following the determination of net realisable value at the reporting period, each asset is individually assessed in order to calculate an impairment/reversal of impairment. A reversal of an impairment charge may occur for previously impaired assets where the net realisable value increases. Increases are limited to an amount which results in assets being carried at their historic cost. Any movements in the valuation of land and property assets are shown in Net Expenditure as an impairment charge/credit.

Firms supporting the year end valuation exercise at 31 March 2020 were directed by the Royal Institute of Chartered Surveyors (RICS) to attach a ‘material valuation uncertainty’ comment to valuations in light of the COVID-19 pandemic and the difficulties they encountered in forming a judgement about valuations. This direction was removed during September 2020 and this remains the case at 31 March 2021.

Options purchased in respect of land are capitalised initially at cost. Options are reviewed annually for impairment as part of the valuation of the whole portfolio.

The valuation of land on which the Agency acts as developer, where external contractors manage build and sales on behalf of the Agency is based on the value of the contract and progress to date. The contract value is adjusted to reflect any costs expended and any sales achieved in year.

Disposal of land and property assets

Where proceeds are receivable over a period of more than 12 months after the end of the reporting period, the proceeds are discounted at a rate prescribed by HM Treasury to reflect the net present value of the receipt.

Where a land sale agreement includes an overage clause, IFRS 9 requires that any associated receivable is measured (discounted to reflect the net present value of the receipt as described above) and disclosed as a financial asset at Fair Value Through Profit or Loss (FVTPL). Over time, the initial discount unwinds through Net Expenditure as a valuation gain. The associated overage clause is measured and disclosed separately as a financial asset at FVTPL (level 3 hierarchy).

Where no overage clause exists, the receivable is measured and disclosed as a financial asset at Amortised Cost. Over time, the initial discount unwinds through Net Expenditure as interest income.

n) Provisions in respect of environmental liabilities

Provisions are made for environmental liabilities where the Agency is under a statutory, contractual or constructive obligation to remediate land to relevant standards. The amounts provided are the best estimate of the expenditure required to settle the obligation, based on circumstances existing at the reporting date.

o) Financial assets

Recognition and derecognition

Financial assets are recognised in the Statement of Financial Position when the Agency becomes a party to the contractual provisions of the instrument (this is usually when cash is initially advanced to the counterparty, but for Help to Buy assets this is at the point of legal completion of the underlying property purchase) and measured at fair value on recognition.

Where differences between the fair value at initial recognition, as calculated using the methods described in Note 14c and Note 15, and the price paid by the Agency to acquire the instrument are significant, they are either:

• recognised as grant expenditure where fair value is estimated to be below cost, in accordance with IAS 20 Government Grants; or
• deferred and released over the expected life of the instrument, in accordance with IFRS 9 Financial Instruments.

The Agency fully derecognises a financial asset only when the contractual rights to the cash flows for the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership to another entity. Partial derecognition occurs where part of the contractual cash flows is received – for example where a homeowner chooses to partially redeem their equity loan (known as “staircasing”). Here, the element of the asset which relates to the repayment is derecognised.

Cash and cash equivalents

Cash comprises cash on hand and demand deposits. Cash equivalents comprise amounts in bank accounts where there is an insignificant risk of changes in value, with less than three months’ notice from inception.

Third party cash comprises cash held by solicitors at year-end in relation to deals which were in progress and cash received by the Agency’s mortgage administrator for home equity redemptions.

Trade and other receivables

Trade and other receivables may be measured at fair value or amortised cost depending on the nature of the individual balance. Where the balance is measured at amortised cost, the carrying value is subject to an expected credit loss calculation. Land sale agreements that contain clauses for the recovery of overage, are measured at FVTPL.

Financial asset investments

The Agency follows International Financial Reporting Standard 9: Financial Instruments for all investments, subject to interpretations and adaptations for the public sector context as defined in the FReM.

Classification and measurement of financial assets

Two criteria are used to determine how financial assets should be classified and measured under IFRS 9:

• The business model for managing the asset; and
• The contractual cash flow characteristics of the financial asset.

The measurement categories reflect the nature of the cash flow and the way they are managed. The three categories are:

• financial assets measured at amortised cost (AC);
• inancial assets measured at fair value through other comprehensive income (FVOCI); and
• financial assets measured at fair value through profit or loss (FVTPL).

The contractual cash flow characteristics are either:

• financial assets held to collect cash flows only; or
• the assets are held to collect cash flows and to sell.

Financial assets are measured at Amortised Cost if they are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and their contractual cash flows represent solely payments of principal and interest.

Financial assets are measured at Fair Value Through Other Comprehensive Income (FVTOCI) if they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and their contractual cash flows represent solely payments of principal and interest. Currently, the Agency has no assets which meet the requirements to be recognised under this classification.

Other financial assets are measured at Fair Value Through Profit or Loss. There is an option to make an irrevocable election for non-traded equity investments to be measured at Fair Value Through Other Comprehensive Income, in which case dividends are recognised in profit or loss, but gains or losses are not reclassified to profit or loss upon derecognition, and impairment is not recognised in the income statement. The Agency has not chosen to make this election for any financial assets.

As a consequence, all financial assets which do not meet the criteria for classification to be recognised and measured at Amortised Cost are recognised and measured at Fair Value Through Profit or Loss (FVTPL). Business models are determined on initial application.

The Agency assesses the business model at a portfolio level. Information that is considered in determining the business model includes:

• policies and objectives for the relevant portfolio; and
• how the performance and risks of the portfolio are managed, evaluated and reported to management.

Financial assets managed on a fair value basis are held at Fair Value Through Profit or Loss (FVTPL) with no elections made to classify as Fair Value Through Other Comprehensive Income (FVTOCI).

In assessing whether contractual cash flows are solely payments of principal and interest, terms that could change the contractual cash flows so that it would not meet the condition for solely payments of principal and interest are considered, including:

• contingent and leverage features;
• non-recourse arrangements; and
• features that could modify the time value of money.

Assets measured at fair value

Most of the Agency’s financial assets are measured at fair value. Under IFRS 9 the Agency is required to value assets in accordance with IFRS 13: Fair Value Measurement. The practical application of this standard is explained with reference to the Agency’s asset portfolios in Notes 14c and 15, with detail regarding the key assumptions which support the Agency’s most significant fair value estimate set out in Note 17a.

When determining the fair value hierarchy level under which a financial asset should be disclosed under the requirements of IFRS 13, the Agency considers the observable inputs used within the valuation of the asset.

The Agency considers the following factors in determining whether there have been any transfers between levels of the fair value hierarchy:

• for financial assets previously valued using unobservable inputs and therefore disclosed under Level 3 of the fair value hierarchy, if it has been determined that observable inputs are now available to measure the fair value of the asset, the Agency would consider whether the asset should be disclosed within Level 1 or Level 2 of the fair value hierarchy; and
• for financial assets previously valued using observable inputs and therefore disclosed within Level 1 or Level 2 of the fair value hierarchy, if it has been determined only unobservable inputs are now available or observable inputs must be adjusted using unobservable inputs, the Agency would consider whether the asset should be disclosed within a lower level of the fair value hierarchy.

The above factors are considered at least annually for individual assets or particular asset classes.

Assets measured at amortised cost

Assets are valued by applying effective interest rates, calculated to recognise interest in accordance with IFRS 9 requirements to capitalise transaction costs and recognise fee income as finance income, spread over the life of the investment. Valuation of assets is subject to the impairment requirements of IFRS 9 for recognising write-off adjustments, modification adjustments and Expected Credit Loss allowances.

Impairment

IFRS 9 requires the Agency to recognise expected credit losses anticipated within the next 12 months based on unbiased forwardlooking information. Where a significant increase in credit risk is identified the Agency is required to recognise total lifetime expected credit losses.

The measurement of expected credit loss involves increased complexity and judgement including estimation of probabilities of default, loss given default, a range of future economic scenarios, estimation of expected lives and estimation of exposures at default and assessing significant increases in credit risk.

Key concepts and management judgements

The impairment requirements are complex and require management judgements, estimates and assumptions. Key concepts and management judgements include:

Determining a significant increase in credit risk since initial recognition

As aforementioned, IFRS 9 requires the recognition of 12 month expected credit losses (the portion of lifetime expected credit losses from default events that are expected within 12 months of the reporting date) if credit risk has not significantly increased since initial recognition (stage 1), and lifetime expected credit losses for financial instruments for which the credit risk has increased significantly since initial recognition (stage 2) or which are credit impaired (stage 3).

The Agency assesses when a significant increase in credit risk has occurred based on quantitative and qualitative assessments for individual investments.

Default

Default is deemed to have occurred when a borrower has materially defaulted on their obligations and/or there is evidence that a Counterparty is experiencing Financial Difficulty and their ability to repay is impaired. Homes England rebuts the presumption that exposures where payments past due exceed 90 days results in default. This is rebutted on the basis Homes England primarily advances development loans where interest is accrued and capitalised and repayment primarily comes from the sale of developed collateral (Dwellings or Land) and a delay in a sale or repayment is not always reflective of a Significant Increase in Credit Risk (SICR) or default.

In determining whether a counterparty and resultantly a financial asset is classified as being in default Homes England assess a range of factors including, but not limited to:

• Whether a significant breach of lending terms and obligations has occurred i.e. a breach in financial covenants, legalisation or litigation has occurred.
• The availability of “Cure”, “Remedy” or “Standstill” periods and whether these have lapsed. These provisions, where agreed with the borrower at the outset, provide an opportunity (during a restricted time period) for the Borrower to rectify a default before enforcement action is taken. These provisions are commonly used by lending institutions.
• Whether there is a realistic prospect for any distress to be remedied by the Counterparty or Beneficial Owners without significant lender intervention and contract modification.
• Where relevant, if another lender to the counterparty has recognised a default resulting in a SICR regardless of whether this triggers cross default provisions.

As Homes England’s Loans and Advances which meet the requirements to be measured at amortised cost are broadly consistent in nature, all being commercial loans and advances to companies involved in Housing Investment and Development a consistent approach to default is taken across the organisation.

Counterparties and associated Financial Assets which are deemed to be in default are only considered to have cured and returned to Stage 2 or Stage 1 following completion of a restructure which has resulted in the Counterparty’s ability to repay their obligations no longer being impaired. Any restructure which results in Homes England absorbing a loss as a result will result in the Financial Asset being classified as in default.

Homes England does not utilise probation periods when assessing the Staging of a Financial Asset and therefore assets can move upwards through the Stages without restriction. The approach reflects the nature of Homes England’s activities which are heavily concentrated in Development Finance and whereby distress and default is ordinarily only reversed through significant intervention or modification or a fundamental change in economic conditions. In the absence of these factors our expectation is that defaulted assets will remain in default until exited.

Forward-looking information

Credit losses are cash shortfalls from what is contractually due over the life of the financial instrument. Expected credit losses are a measure of unbiased probability-weighted credit losses which might reasonably be expected, determined by evaluating a range of possible outcomes and considering future economic conditions. When there is a nonlinear relationship between forward-looking economic scenarios and their associated credit losses, a range of forward-looking economic scenarios, currently expected to be a minimum of three, will be considered to ensure a sufficient unbiased representative sample of the complete distribution is included in determining the expected loss.

Homes England assigns Credit Risk Ratings (CRR) to all counterparties with whom the organisation has provided Financial Assets that are measured at amortised cost. The CRR utilises a combination of qualitative and quantitative information including, previous financial performance and strength, projected cashflows and leverage alongside more qualitative factors such as management experience. This assessment culminates in a single CRR figure and associated probability of default being applied based on the overall credit assessment of the given counterparty. This rating takes into consideration past financial performance (where evident) and expected performance of a given counterparty and critically the underlying project.

The probability of default values associated with each CRR under the most likely central scenario have been determined by adjusting the average probability of default values cascaded by MHCLG, to allow for current economic projections by considering historical movements in the various economic indexes. This methodology is then combined with an overall expert subjective opinion to produce estimates of the final adjusted probability of default rates.

To ensure compliance with IFRS 9, Homes England has adopted an additional Probability Weighted assessment of Expected Credit Losses, utilising two plausible alternative economic scenarios. As Homes England operates in a single sector (Housing) the loans and advances made are greatly concentrated and as a result defaults may be more greatly correlated in comparison to a loan portfolio which benefits from sector diversification.

The alternative economic scenarios adopted during 2020/21 are derived from the macroeconomic forecast scenarios provided by the OBR. A sensitivity analysis with regard to this judgement is provided in Note 17b.

The decision on how to weight these scenarios against the central scenario is primarily derived from expert judgement within Homes England. Alternative scenarios and weightings are reviewed on a minimum of a six-monthly basis and scrutinised through the Agency’s forums and committees.

Expected life

Lifetime expected credit losses must be measured over the expected life of individual agreements. For modelling purposes, this is restricted to the maximum contractual life of investments. Potential future modifications of contracts are not considered when determining the expected life or exposure at default until they occur.

Discounting

Expected credit losses are discounted at the effective interest rate at initial recognition or an approximation thereof and consistent with income recognition. For loan commitments, the effective interest rate is that rate that is expected to apply when the loan is drawn down and a financial asset is recognised. For variable / floating rate financial assets, the spot rate at the reporting date is used and projections of changes in the variable rate over the expected life are not made to estimate future interest cash flows or for discounting.

Modelling techniques

Expected credit losses are calculated at the individual financial instrument level by multiplying three main components, being the probability of default, loss given default and the exposure at default, discounted at the original effective interest rate. The methodology and key assumptions are outlined in detail in Note 17b.

Write-offs

Homes England manages distressed Financial Assets through a specialist team with experience in restructuring and insolvency.

Most of Homes England’s loans and advances have the benefit of security and write offs take place once all such security has been realised or there is no realistic prospect of recovery and the amount of the loss has been determined.

Events that typically result in a write-off ahead of security being fully realised include, but are not limited to:

• The Financial Asset is subject to Insolvency Proceedings and the only funds that will be received are the amounts estimated by the Insolvency Practitioner.
• Security (typically property) is disposed of and a decision is made that no further funds will be received.
• Independent Professional advice (typically third-party valuations or assessments) shows a significant shortfall with limited evidence that any shortfall will be recouped.

Any further recoveries of amounts previously written off are generally considered fortuitous gains and reduce the amount of impairment losses recorded in the Statement of Consolidated Net Expenditure.

p) Financial liabilities

Financial liabilities are recognised in the Statement of Financial Position when the Agency becomes a party to the contractual provisions of the instrument.

All non-derivative financial liabilities are initially measured at fair value and subsequently measured at amortised cost.

Financial liabilities consist of trade and other payables and certain provisions.

Financial liabilities are classified as current liabilities unless the Agency has an unconditional right to defer settlement for at least 12 months after the end of the reporting period.

The Agency derecognises a financial liability only when the Agency’s obligations are discharged, cancelled or they expire.

q) Pension costs

The Agency accounts for pension costs in accordance with IAS 19 Employee Benefits. During the year the Agency’s employees were able to participate in one of the following contributory pension schemes: The Homes and Communities Agency Pension Scheme, The City of Westminster Pension Fund or the West Sussex County Council Fund. All three schemes are multi-employer defined benefit schemes as described in paragraph 8 of IAS 19.

Plan assets are measured at fair value. Liabilities are measured on an actuarial basis and discounted to present value. The net asset or obligation is recognised within pension assets or liabilities, respectively, in the Statement of Financial Position. The operating and financing costs of the schemes are recognised separately in the Statement of Comprehensive Net Expenditure. Service costs are spread over the working lives of employees and financing costs are recognised in the period in which they arise. Actuarial gains and losses are recognised in full in taxpayers’ equity.

Because assets managed under the Agency’s pension schemes are mainly in quoted investments, the pension assets stated at year-end are less susceptible to valuation uncertainty due to COVID-19 than other balances disclosed in the Agency’s Financial Statements. Of the £988.7m employer assets at 31 March 2021 disclosed in Note 22, only £55.4m (5.6%) was investment in property and is subject to the uncertainty outlined above in relation to the Agency’s land and property assets.

Similarly, the discount rates used for scheme liabilities are derived from bond markets and so are determined with reference to published figures. This means that COVID-19 did not create significant additional uncertainty for the calculation of the scheme liabilities as at 31 March 2021.

r) Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership of the asset to the lessee. All other leases are classified as operating leases.

Operating lease rentals receivable and payable are accounted for in the Statement of Comprehensive Net Expenditure on a straightline basis over the term of the lease.

s) Impact of standards and interpretations in issue but not yet effective

International Financial Reporting Standard 16: Leases (IFRS 16)

In 2018/19 the Agency reported that IFRS 16 would be effective from 2020/21. Following the COVID-19 pandemic, which has put additional pressure on some public bodies which have significant lease arrangements, HM Treasury has decided that the implementation of IFRS 16 will be delayed and the standard will now be effective for the Agency’s 2022/23 reporting period.

The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The Agency expects to reclassify many of its leases, particularly for property, as finance leases as a result. Principally, this will reduce administrative accommodation costs and increase depreciation charges, as well as increasing gross assets and liabilities.

The Agency has a low accommodation requirement in relation to its financial size and, as a result, we anticipate that the value of operating or finance leases which will be impacted by the new standard will be immaterial to the Agency’s financial statements.

International Financial Reporting Standard 17: Insurance Contracts (IFRS 17)

IFRS 17: Insurance Contracts replaces IFRS 4 Insurance Contracts. The new standard will apply more standardised and rigorous requirements on accounting for insurance contracts, setting out clearer expectations on the recognition, classification and measurement of assets and liabilities in relation to insurance contracts. The implementation is not planned until 2023 and it may require further adaptation for the Public Sector. We anticipate that the standard will not be significant to the Agency’s Financial Statements.

2 Impact of COVID-19[***]

This note sets out:

a) A summary of the financial impact of COVID-19 and scenarios of our recovery on asset values;

b) The United Kingdom’s current position in relation to COVID-19 including high-level accounting considerations;

c) Critical accounting judgements which have been applied in producing the 2020/21 financial statements and key sources of estimation uncertainty; and

d) The potential impact on asset valuations for individual groups of assets from alternative COVID economic recovery scenarios.

a) Potential financial impact of alternative post-COVID scenarios on asset values

Applying metrics from possible alternative macro-economic scenarios to model changes to asset values allows us to estimate the potential future effect of market uncertainty, due mainly to COVID-19, for 95.5% of the Agency’s assets as at 31 March 2021, giving a good indication of the potential overall effect of the pandemic on asset valuations.

This analysis takes no account of additions or disposals in the next 12-month period and does not seek to forecast the Statement of Financial Position for 2021/22. However, it is a good indication of the risks faced by the Agency and the quantum of movements in asset values which might reasonably be expected as a result of the ongoing pandemic and the United Kingdom’s recovery from it.

Details of how this analysis has been performed for each group of assets in the table below are included in section d of this note. For Expected Credit Losses (ECL) on loans at amortised cost, the accounting estimate is produced annually using a probability-weighted sum of outputs under different scenarios and so a single measure can be extracted from this methodology to use for each economic scenario here.

As indicated in the table above, the Agency’s central scenario sees the aggregate value of the portfolio of assets fall by £0.3bn (1.5%) during 2021/22, with March 2022 being the point when asset values are lowest. This contrasts with the Agency’s downside, where asset values reduce through the year and are estimated to be £1.4bn lower at March 2022 (7% down), with further falls of around £0.6bn expected under this scenario during 2022/23. Finally, under the Agency’s upside scenario, overall asset values are expected to be £0.2bn (1%) up at 31 March 2022 compared to March 2021. This reflects a position where the market has substantially recovered, but where potential levels of mortgage arrears reduce the returns estimated from home equity assets.

The most significant thing to note from this analysis is the overall uncertainty surrounding the potential future impact of market on asset values, with a £2.2bn range in anticipated values across the three scenarios, modelled based on the market conditions associated with each scenario at March 2022.

b) Background to COVID-19

The United Kingdom’s position in relation to COVID-19 is much improved from year-end 2019/20. While it has experienced a once in 300-year economic shock, the advent of numerous effective vaccines coupled with an effective rollout mean that the economy is forecast to rebound strongly in 2021/22 and 2022/23.

Since the start of the pandemic, the Agency has directed significant work to monitor market conditions, this has informed our forward assumptions and modelling.

Central guidance

When calculating the impact of COVID-19 on the Agency’s Financial Statements, the Agency has considered guidance issued by national and international authorities and professional bodies.

The Financial Reporting Council has issued guidance noting that making forward-looking assessments and estimates when preparing financial statements and providing other corporate reports is particularly difficult at this time. The Council highlights the need for entities to adequately consider the basis of any significant judgements when confirming the preparation of the financial statements on a going concern basis and the increased importance of providing information on significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made.

Banking regulatory bodies, such as the European Banking Authority, the European Securities and Markets Authority and the Bank of England (in a joint statement with the Prudential Regulatory Authority published in March 2020) have highlighted the need for entities not to make blanket assumptions concerning significant increases in credit risk, with the Prudential Regulatory Authority stating:

The PRA reminds firms that forward-looking information used to incorporate the impact of COVID-19 on borrowers into the expected credit loss (ECL) estimate needs to be both reasonable and supportable for the purposes of IFRS9. Given the sudden onset of the virus, the PRA believes that there is very little such information available as yet, and regards the preparation of reliable and detailed forecasts as very challenging currently. In the event firms believe such forecasts can be made, the PRA expects firms to reflect the temporary nature of the shock, and fully take into account the significant economic support measures already announced by global fiscal and monetary authorities.

In particular, any such forecasts should take into account the relief measures – such as repayment holidays – that will be made available to enable borrowers who are affected by the COVID-19 outbreak to resume regular payments.

The PRA reaffirmed the pertinence of this guidance in August 2020. The Agency has taken this guidance into account in preparing the 2020/21 Financial Statements, with particular emphasis on the assumptions for expected credit losses, where the estimate is particularly reliant on forward-looking information.

Going concern

For any entity impacted by COVID-19, it is important to consider whether the economic conditions which have arisen due to the pandemic cast significant doubt over its ability to continue as a going concern. This must be considered in both the immediate term, as significantly reduced activity during the lockdown will have put pressure on an entity’s ability to generate cashflows sufficient to meet liabilities as they become due, and for the longer term, as long-term economic scarring, such as higher unemployment and lost GDP may impede an entity’s ability to continue to operate.

The Agency is funded with Grant-in-Aid by the Ministry of Housing Communities and Local Government (MHCLG) to achieve policy objectives rather than as a commercial entity.

Homes England and MHCLG have agreed a rolling five-year business plan and Grantin-Aid for the year ending 31 March 2022, taking into account the amounts required by our liabilities falling due in that year, has already been approved by Parliament. Therefore, the Agency’s Board considers that the continuing effects of the COVID-19 pandemic has not changed its view that it is appropriate to adopt a going concern basis for the preparation of the Agency’s financial statements in 2020/21.

c) Critical accounting judgements and key sources of estimation uncertainty

The following disclosures provide information which allows users of the Agency’s 2020/21 financial statements to understand the key judgements made in preparing the financial statements and sources of uncertainty as a result of COVID-19.

It is important to note that some estimates are based on market information as at 31 March 2021 and others are based on expectations of future performance. Broadly, our valuations fall into these categories as follows:

Assets valued with reference to observed evidence of conditions and prices which existed at 31 March 2021:

• Home equity loans, including Help to Buy
• Loans measured at amortised cost: Write-offs

Assets valued with reference to expectations of future performance:

• Loans measured at amortised cost: Expected Credit Losses
• Value of land and property assets
• Other financial assets measured at fair value

There is ongoing material uncertainty as to the future performance of the housing market, and therefore the value of the Help to Buy Portfolio as reported at 31 March 2021. Users of the accounts may wish to consider the future risks to the portfolio from changes in the economic environment as the United Kingdom recovers from COVID-19. The sensitivity analysis in section c of this note considers this risk and quantifies the potential impact of alternative scenarios.

Home equity loans, including Help to Buy

With the Agency’s portfolio of Help to Buy assets valued at c. £17.3bn and the residual portfolio of legacy equity loan assets valued at just over £232m, this is the most significant area of the Agency’s Statement of Financial Position.

As outlined in Note 1f these assets are valued with reference to regional house price indices (HPI), supplemented by adjustments for the Agency’s experience of actual disposals since the inception of the schemes. The ONS resumed regular publication of HPI following the first lockdown, however there is still uncertainty over the future performance of the housing market as a result of forecast higher unemployment and the ending of the Stamp Duty holiday.

The Agency performs a market risk analysis (Note 16) which considers how the valuation of this portfolio would change with movements in house prices and a further sensitivity analysis (Note 17a) which looks at the key modelling assumptions and illustrates the effect of varying them.

Loans measured at amortised cost: Write-offs and Expected Credit Losses

The two components of loans measured at amortised cost which are impacted by COVID-19 are asset-level write-offs, where specific evidence of impairment has been identified, and the Expected Credit Loss allowance, where a portfolio-level estimate of future losses is made in accordance with International Financial Reporting Standard 9: Financial Instruments (IFRS 9).

IFRS 9 requires an Expected Credit Loss allowance calculation to be performed with reference to the level of credit risk and performance of each investment. The determination of the risk associated with each asset is a key judgement by management as the result determines whether a 12-month loss allowance or a lifetime loss allowance is calculated for that asset. The Expected Credit Losses are calculated by comparing the estimated balance at the time of default against moderated security values (calculated by applying Modified Security Value percentages (MSVs) to gross security values to estimate the likely value which might be realised from a sale of security in distressed circumstances). In accordance with the requirements of IFRS 9, a minimum loss on default value is applied (this is currently 35%, see accounting policies – Loss Given Default (LGD) Floor). The calculated loss on default is then multiplied against an associated Probability of Default percentage value (PD) for the relevant loss calculation period. The PD value applied is determined based on the Credit Risk Rating of the associated asset using industry metrics for default.

Whether a 12-month loss allowance or a lifetime loss allowance is calculated for each asset is determined in accordance with IFRS 9, based on whether there has been a Significant Increase in Credit Risk (SICR) after the investment was first made. In line with the work done to consider whether any specific write-off adjustments are required, the Agency’s Watchlist process has also considered whether there is evidence of a Significant Increase in Credit Risk (SICR), taking the guidance issued by the PRA into account. This was only identified in a handful of cases in the period after 31 March 2021 until these Financial statements were produced and was considered in producing the Agency’s estimate of Expected Credit Losses. In accordance with IAS 10, we have continued to assess new information up until the time at which the financial statements were published and have identified no further instances of SICR which would require adjustments to be made prior to publication.

In addition to calculating either 12-month or lifetime loss allowances, IFRS 9 also requires consideration of how the calculation would vary under alternative economic scenarios. The Agency achieves this by varying the application of PD assumptions to the same base loan data for each scenario modelled. In addition, the Agency varies the MSVs applied to the ECL allowance calculation performed under each economic scenario, to reflect the relative expected discount on gross security values in a distressed situation for each economic scenario. The results calculated for each scenario are then used to calculate an unbiased, weighted-average loss allowance. This is done by using the relative likelihood of each scenario, based on the Agency’s view of their relative probability. Details of key modelling assumptions which have been varied in response to the COVID-19 pandemic are as follows:

Economic scenarios and relative weightings

The economic scenarios applied to inform the ECL allowance calculation were derived from the Office for Budget Responsibility (hereafter, OBR) macro-economic scenario forecasts. They are used for stress testing and sensitivity analysis and reflect a plausible range of economic outcomes. The Agency’s Economics Team then provide relevant metrics and assess these scenarios based upon their likelihood to determine our scenarios weightings.

The decision on how to weight these scenarios against the central scenario was discussed with colleagues in the Risk teams but is primarily derived from expert judgement within Homes England. The weightings applied for the Financial Statements are as follows:

• base scenario = 70%
• downside scenario = 15%
• upside scenario = 15%

Probability of default

Basic values for the probability of default (PD) associated with each credit risk rating score to be applied to investments is provided to the Agency by MHCLG, however these reflect a more benign economic environment. The Agency’s Risk team then have adjusted these PDs to determine the central, downside and upside PD tables to reflect the scenarios noted above which were developed by the Agency’s Economics team. The Agency’s Risk Team performed this work, employing the same methodology to determine the PDs that is used for the Agency’s annual stress-testing exercise, which is subject to an appropriate level of internal governance and challenge.

Moderated security values (MSVs)

The economic metrics determined by the Agency’s Economics Team for each of the three scenarios include measures which estimate how development land values may change over time in response to each scenario. Because security held against the Agency’s investments are mainly land, this enables the Agency to moderate the security values applied to limit losses on default under each scenario, resulting in a more appropriate expectation of likely losses.

The Agency performs a sensitivity analysis (Note 17b) which illustrates the effect of varying these assumptions.

Valuation of land and property assets

Valuations for land and property assets are performed by internal and external valuers when there is evidence of a change in value but in all cases where the net realisable value of the asset was more than or equal to £5m in the preceding year (see accounting policies). However, during the year and in light of the potential for uncertainty arising from the COVID-19 pandemic, a decision was made at the outset of the valuation process that all assets with a net realisable value of £150,000 or more would require a valuation. Valuations are required to adhere to the current edition of RICS Valuation – Professional Standards, i.e. Red Book valuations. The valuation methodology reflects the Agency’s objectives and conditions for each asset.

The annual valuation exercise has been carried out against the backdrop of the ongoing COVID-19 pandemic, and strong house price growth in the residential market, with difficulties in the commercial sector. To ensure that the Agency has a portfolio valuation as at 31 March 2021, valuation assessments have been made on the evidence available to valuers at the time. During 2019/20, it was acknowledged that there was uncertainty attached to the valuations. Reflecting this, firms supporting the Agency’s year-end valuation exercise were directed by the Royal Institute of Chartered Surveyors (RICS) to include a disclaimer highlighting ‘material valuation uncertainty’. However, during 2020/21, this direction was removed by RICS.

During the current financial year, activity resumed within the housing market and there is sufficient evidence to provide valuations no longer subject to this uncertainty. House prices have performed strongly over the last year. However, there remains some ongoing uncertainty around the future performance of the housing market, with the risk of inflation necessitating higher interest rates or the withdrawal of demand-side support cooling the market. These factors do not impact on the current valuations as valuations are conducted at a ‘point in time’ and are materially correct as at the 31 March 2021.

To provide an indication of the level of change needed to estimated property values to have a significant impact, our calculations indicate that if average values fell by 10%, a £74m reduction in portfolio values would arise.

Other financial assets measured at fair value

Other than the PRS Real Estate Investment Trust (PRS REIT), which is measured with reference to published unit prices, and HtB Equity Loans/Other legacy equity loans which are valued with reference to a wider market, all other financial assets measured at fair value are held in the level 3 hierarchy under International Financial Reporting Standard 13: Fair Value Measurement (IFRS 13) and are valued with reference to discounted cashflows.

Loans measured at Fair Value Through Profit or Loss (FVTPL)

Where loans do not meet the requirements under IFRS 9 to be accounted for at amortised cost, they are held at fair value through profit or loss (FVTPL). Despite this, they continue to be managed under the same operational controls as other loans and are subject to the same Watchlist processes, ensuring that any risks to recovery are identified, considered and reflected in forecast cashflows which are then used to inform the valuation of assets at year-end.

As with loans measured at amortised cost, no significant evidence of impairment as a result of the ongoing pandemic has surfaced in the period after 31 March 2021 until these Financial statements were produced. In accordance with IAS 10, we have continued to assess new information up until the time at which the financial statements were published and have identified no further instances of distress which would require adjustments to be made prior to publication.

Other level 3 financial assets measured at fair value

Other level 3 financial assets measured at fair value of c. £184m (1.0% of all financial asset investments) have been recognised on the Statement of Financial Position as at 31 March 2021. These assets are valued with reference to cashflow data maintained for individual assets by project managers and, whilst subject to individual scrutiny, are not subject to the same oversight as loans which are subject to the Agency’s regular Watchlist process. This is because the investments are not primarily subject to credit risk but were made to share risk in an underlying development.

The assessment of the performance of these loans now includes a year of data from the COVID-19 pandemic, however given the nature of the valuation there remains a degree of uncertainty in the forecast future cashflows. In accordance with IAS 10, we have continued to assess new information up until the time at which the financial statements were published and have identified no changes to forecasts which would require adjustments to be made prior to publication.

Defined benefit pensions

The value of the Agency’s defined benefit pension assets and liabilities have been assessed by qualified independent actuaries.

In making these assessments, it is necessary for actuarial assumptions to be used which include future rates of inflation, salary growth, discount rates and mortality rates. Differences between those estimates used and the actual outcomes will be reflected in taxpayers’ equity in future years.

Because assets managed under the Agency’s pension schemes are mainly in quoted investments, the pension assets stated at year-end are less susceptible to valuation uncertainty than other balances disclosed in the Agency’s Financial Statements. Of the £989m employer assets at 31 March 2021 disclosed in Note 22c, only £55.4m (6%) was investment in property and is subject to the uncertainty outlined above in relation to the Agency’s land and property assets.

Similarly, the discount rates used for scheme liabilities are derived from bond markets and so are determined with reference to published figures. This means that the ongoing did not create significant additional uncertainty for the calculation of the scheme liabilities as at 31 March 2021.

d) Potential impact on asset valuations from alternative economic scenarios during 2020/21

To aid users of the accounts in understanding the potential risks posed by COVID-19 to the assets managed by the Agency, we have used the scenarios developed by the OBR to inform the 2020/21 Expected Credit Loss allowance to estimate what the effect of each scenario might be on the Agency’s key asset classes.

By applying relevant metrics from these scenarios to the Agency’s key asset categories we can model the potential impact of ongoing market uncertainty due to the pandemic on assets disclosed in the 2020/21 Financial Statements.

Home Equity Loans (including Help to Buy)

For home equity loans the principal drivers influencing changes to the valuation of assets are house prices, the proportion of homeowners who go into arrears with their mortgage (for example as a result of redundancy) and the proportion of homeowners who are potentially repossessed by their first charge lender.

The impact of the three scenarios (relative to the position as at 31 March 2021) is:

Loans

For loans measured at amortised cost, the Expected Credit Loss allowance (ECL) reflects a weighted average of the outcomes which might be expected under each of the three scenarios. To model the effect of each scenario individually we have considered the outputs from each individual scenario ECL calculation. In addition, we have considered whether the credit-risk stages of assets (based on an assessment of SICR) might change under each scenario.

For users’ reference we have modelled the impact under each scenario if all assets were moved to stage 2 (indicating a significant increase in credit risk for all assets), with the modelling for the downside scenario producing an increased ECL of £121m under these assumptions.

For loans measured at fair value through profit or loss (FVTPL), the fundamental contractual nature of these loans and primary exposure to variation in returns is comparable with loans measured at amortised cost and so the ECL percentages estimated for the loans measured at amortised cost are considered to be a suitable measure to estimate how asset values will vary under different economic scenarios.

Land

The scenarios modelled by our Economics Team include specific metrics for changes in development land values.

Other level 3 financial assets measured at fair value

Other level 3 financial assets are held across both our investment and land portfolios. We have applied land and house price indexes to forecast our balance sheet growth under our three scenarios, applying 100% scenario weighting to each individual case.

This will provide indicative development returns, projected as at March 2022.

3 Operating segments[***]

a) Operating segment analysis

The Agency’s operational performance is managed by reference to financial and nonfinancial targets, within the constraints of programme and operational expenditure limits set by MHCLG. These programmes therefore form the basis of the Agency’s operating segments as defined by IFRS 8 Operating Segments.

All of the Agency’s activities, and therefore its income, expenditure, assets and liabilities, occur within the UK. An analysis of the various types of income which the Agency receives is shown in the Statement of Comprehensive Net Expenditure.

As many of the Agency’s programmes do not generate their own revenue, and are financed by Grant-in-Aid, the financial measure used by the Board to assess the Agency’s operating performance and manage its resources is programme and administrative expenditure and receipts against Departmental Expenditure Limits (DEL). The programme and administrative expenditure and receipts information below is presented on the basis of the information presented to the Board.

Some of the figures in 2019/20 have been reanalysed to account for changes in the way programmes are reported to board, in particular the splitting of Direct Commissioning and Accelerated Construction.

b) Reconciliations to net expenditure

Net DEL expenditure, the financial measure used to report the Agency’s performance to the Board, excludes certain items which are disclosed separately in the Statement of Comprehensive Net Expenditure such as provisions for impairment, movements in other provisions, depreciation and income tax. It also includes items of expenditure which, for statutory reporting purposes, are capitalised in the Statement of Financial Position. Such items include additions to and disposals of non-current assets, loans and land and property assets. In addition, there are instances where there are timing differences between income and expenditure recognised for statutory reporting purposes and for DEL reporting, such as a restriction on recognising income on certain disposals until cash is received. For statutory reporting purposes income is recognised when the Agency is contractually entitled to receive the income. These rules are prescribed by HM Treasury.

A reconciliation of total DEL expenditure to net expenditure before tax as shown in the Statement of Comprehensive Net Expenditure is as follows:

A reconciliation of programme receipts as shown above to income as stated in the Statement of Comprehensive Net Expenditure is as follows:

[*] Help to Buy and FirstBuy receipts are not reported to the Agency’s board as they are outside the scope of budgets delegated to the Agency to be managed. Cash received is transferred as Consolidated Fund Excess Receipts (CFER) via the Ministry of Housing Communities and Local Government to HM Treasury.

c) Major customers

During the year, income from individual customers did not exceed 10% of total income (2019/20: nil).

4 Principal/Agent relationships[***]

Homes England is party to a number of significant arrangements where it acts as an Agent for another entity. In these arrangements, Homes England uses its skills and expertise to help bring forward programmes and initiatives. These programmes and initiatives are in addition to the core business of the Agency. It therefore would not be appropriate to show income or expenditure in respect of these transactions or to report on assets and liabilities. The below sets out these arrangements.

Managing programmes for other Government departments

The Agency has an agreement with the Department of Health and Social Care (DHSC) in respect of the Care and Support Specialised Housing Fund. Under this programme, DHSC funds specialist housing for older people and adults with disabilities. The programme is delivered and managed by the Agency on behalf of DHSC. During the year grants totalling £10.5m (2019/20: £22.3m) were paid out by the Agency and reimbursed by DHSC.

The Agency also has agreements with the Ministry of Housing, Communities and Local Government (MHCLG) for the management and delivery of their Voluntary Right to Buy (VRTB), Next Steps Accommodation, Cladding Fund, and Building Safety Fund programmes:

Voluntary Right to Buy: Under this programme MHCLG compensate Registered Providers for loss of rent where tenants buy their own property. During the year, grants of £13.3m (2019/20: £103.4m) were paid by the Agency and reimbursed by MHCLG.

Next Steps Accommodation: Homes England are supporting MHCLG, leading housing associations and Local Authorities to deliver the ambitious plans which will fast-track thousands of long-term homes for rough sleepers. During the year, grants of £43.1m (2019/20: £nil) were paid out by the Agency and reimbursed by MHCLG.

Cladding Fund: The fund was set up to replace aluminium composite material (ACM) cladding panels on large-scale residential social housing and this has been extended to the private sector. During the year, grants totalling £30.0m (2019/20: £9.8m) were paid out by the Agency and reimbursed by MHCLG.

Building Safety Fund: This fund is focused on unsafe non ACM cladding systems – high pressure laminates, other metal composite materials etc – on both social and private sector buildings over 18m in height. Ministerial targets are that building owners should have made full applications by the end of the calendar year and that work should have started on site by 31 March 2021. During the year, grants of £37.6m (2019/20: £nil) were paid out by the Agency and reimbursed by MHCLG.

Managing assets for third parties

The Agency manages home equity portfolios on behalf of the Greater London Authority (GLA), Ministry of Defence (MoD) and multiple housing developers via our Mortgage Administrator. At the year end the Agency managed 7,145 assets on behalf of these parties. During the year the Agency also collected 1,023 disposal receipts with total proceeds of £26.3m. The Mortgage Administrator collects and distributes disposal receipts to the GLA and housing developers on behalf of the Agency. The Agency receives disposal receipts on behalf of the MoD and subsequently transfers the receipts to the MoD. At the year end the Agency held £1.49m which is due to be paid to the MoD.

The Agency manages three science parks on behalf of the Department for Business, Energy and Industrial Strategy (BEIS). During the year the Agency incurred expenditure of £1m (2019/20: £0.1m) and collected income of £0.2m (2019/20: £0.5m) as a result of day to day management of the sites. The net spend of £0.8m is due to the Agency from BEIS.

MHCLG Guarantee Programme

Homes England acts as Concession Manager on behalf of MHCLG for a number of Guarantee programmes. It employs the commercial and financial expertise in its Investments division to provide an effective interface between MHCLG and the programme delivery partners. These Guarantee Programmes are as follows:

Affordable Housing Guarantee Scheme

A £3.5bn programme to support the delivery of additional new-build affordable homes by enabling registered providers to raise debt with a Government guarantee, where they commit to delivering additional new build affordable homes.

Private Rented Sector Guarantee Scheme

A £3.5bn programme to support the building of new homes for the private rented sector by enabling housing providers to raise debt with a Government guarantee, where they commit to providing additional new homes for private rent.

Affordable Homes Guarantee Scheme

A £3bn programme to provide cost-effective long-term loans to registered providers of homes for affordable social rent, affordable rent and shared ownership. The scheme is complementary to the Affordable Homes Programme.

Homes England also acts as a programme partner to MHCLG in connection with the Enable Build programme. This is a scheme to increase the availability of development finance for small and medium-sized enterprise housebuilders.

Provision of shared services

In addition to the above, the Agency continues to have a close working relationship with the Regulator of Social Housing (RSH). A service level agreement sets out the services provided by Homes England to RSH. Services provided may include, but are not limited to, the provision of accommodation or facilities, the provision of staff time and expertise and the provision of technical resources. During the year, Homes England has charged RSH a fee of £1.1m for these services, credited to other operating income. Invoices are raised and paid monthly. In addition, due to this close working relationship, the systems and processes of Homes England are an important part of the control environment of RSH, and as such, the annual statutory audit of RSH covers a review of the systems and processes. Further disclosure regarding this relationship is provided in the Fees and Charges section of the Annual Report.

5 Grants [***]

Payments were made to Registered Providers of Social Housing, Local Authorities and other public and private sector partners under the following programmes:

	2020/21 £’000	2019/20 £’000
Affordable Housing	1,182,748	1,398,311
Housing Infrastructure Fund	197,828	71,238
Local Authority Accelerated Construction	66,022	22,596
Community Housing Fund	4,065	12,982
City Deals	8,224	2,639
Other	2,016	18,423
	1,460,903	1,526,189

The Agency’s largest grant programme is the Affordable Housing Grant programme. This aims to increase the supply of new affordable and shared ownership homes in England. The fall in the Affordable Housing Grant programme spend since last year is largely due to COVID. The current programmes have been extended to allow for this.

The Strategic Partnership programme is a significant part of the Affordable Housing Grant programme, and totals £670m. (2019/20: £700m). These partnerships provide additional support to Registered Providers for the construction of affordable homes.

The Housing Infrastructure Fund aims to unlock house building by funding Local Authorities to build vital physical infrastructure projects, including the construction of roads, bridges, energy networks and other utilities.

Affordable Housing grant

Affordable Housing grants covers both Strategic Partnership grants and Affordable Housing grants. During the year, Strategic Partnership grants totalled £669m (2019/20: £700m) and Affordable Housing Grant totalled £513m (2019/20: £698m). Both types are paid to partners across England. The table below shows the geographical split.

Of the total Strategic Partnership grants paid of £669m, the top 10 recipients by value totalled £443m (66%). Of the total Affordable Housing Grant paid of £513m, the top 10 recipients by value totalled £143m (28%).

6 Disposal of land and property assets[***]

	Note	2020/21 £’000	2019/20 £’000
Proceeds from disposals		246,285	229,511
Cost of disposals:
Book value of disposals	18	137,905	152,807
Direct costs of sale		3,973	1,708
		141,878	154,515
Gain on disposal		104,407	74,996

The proceeds from disposals above can be further analysed as follows:

	Note	2020/21 £’000	2019/20 £’000
Disposals of land (freehold disposal/building lease)		149,441	172,264
Direct Commissioning (market sales)		88,667	44,078
Direct Commissioning (affordable contracts)		8,177	13,102
Option payments/non refundable deposits paid in respect of land		–	67
Proceeds from disposals		246,285	229,511

Income from the disposals of land (freehold disposal/building lease) is recognised when there is a legally binding sale agreement, which has become unconditional and irrevocable by the end of the reporting period. The income is recognised at the unconditional date and measured at the fair value of the consideration received or receivable for the disposal of land.

Income in relation to option payments/non refundable deposits is recognised on the invoice date.

Income in relation to direct commissioning (market sales) is recognised at legal completion and measured at the fair value of the consideration received or receivable for the property.

Income in relation to direct commissioning (affordable contracts) is recognised over time by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by compliance inspector reports of work performed to date. A contract asset is recognised when the Agency has completed a proportion of the contract activity prior to payment being received. A contract liability is recognised where cash has been received in advance of the contract activity being completed.

7 Programme costs[***]

	2020/21 £’000	Represented 2019/20 £’000
Land	26,788	22,943
Help to Buy	18,772	13,887
Homes England Transformation Programme	14,786	3,726 [*]
Financial Investment Programmes	8,440	5,878
Markets, Partners and Places	3,954	–
Housing Infrastructure Fund	2,987	11,409
Affordable Homes	1,279	2,260
Other programmes	101	–
	77,107	60,103

[*] In 2019/20, Homes England Transformational Programme costs were classified as Other programmes costs.

Programme costs are the operational costs incurred by Homes England to run the various programmes. They are typically professional fees to cover activities such as due diligence, legal advice, financial investigation, administration of payments, and property servicing.

Land costs include £10.6m (2019/20: £10.4m) in relation to the management of the Agency’s land portfolio.

Help to Buy costs mainly relate to transaction fees paid to local agents who administer new equity loans and servicing costs paid to the Agency’s mortgage administrator, who manage the equity loan book.

The Homes England Transformation Programme covers the costs of service design and digital transformation of Homes England. It is a specific programme funded by MHCLG to support the Agency in meeting its mission and objectives by creating new, more efficient services, teams, infrastructure and ways of working. In 2019/20, these costs were categorised as ‘Other programme’ costs. Given the significance of the costs incurred, costs have been reallocated to the ‘Homes England Transformation Programme’ line above.

8 Staff costs[***]

The costs of salaried staff for the year, excluding Board Members, were as follows:

a) Total staff costs

The costs above can be further analysed as follows:

[*] The current service pension cost does not include costs relating to early retirements, which are included within Administration costs, Note 9.

During the year, £7,153,000 of staff costs were capitalised (2019/20: £nil) against Land and Property assets. The costs relate to direct labour involved in the enhancement of land and property assets. During the year, £nil (2019/20: £9,000) was capitalised in relation to systems development.

In addition, £2,010,000 (2019/20: £nil) of staff costs, in relation to the Homes England Transformation Programme, the Building Safety Fund and the Next step Accommodation Fund, were reclassified to programme costs. These programmes are partly funded by the Agency’s programme budget. The Homes England Transformation Programme covers ongoing work involved in transforming the services, processes and infrastructure of Homes England, and is described more fully in Note 7.

b) Staff bonuses

Staff members who are direct employees of the Agency benefit from a Performance Related Pay scheme whereby any bonuses are determined with reference to performance against agreed objectives during the year. Performance Related Pay accrued but not yet paid during the year totalled £320,000 (2019/20: £282,000).

During the year, Directors received bonuses of £22,000 (2019/20: £45,000). The bonuses received during the year relate to 2018/19 performance. The Accountability section of the Annual Report includes further details of bonuses, the average number of staff employed by the Agency, staff numbers by pay band and exit packages.

c) Staff composition

The average number of staff employed by the Agency (full time equivalents) over the course of the year is as follows:

d) Loans to employees

The Agency has provided travel season ticket loans and cycle scheme loans to employees during the year. The total amount outstanding in respect of these at 31 March 2021 was £19,863. There were no other loans to employees.

9 Administration expenditure[***]

	2020/21 £’000	Represented 2019/20 £’000
Accommodation and office running costs	12,928	12,859
Tax and depreciation	9,504	7,503
Professional fees	4,806	1,841
Learning, development and staff	1,602	1,961
Travel and subsistence	1,315	4,662
Auditor’s remuneration (Statutory Audit)	400	350
Other	369	613
Homes England Development Programme	–	5,532
	30,924	35,321

The Homes England Development Programme was set up to ensure the Agency had the capability to become a more dynamic and agile organisation, able to respond to the changing priorities of the sector and ultimately to disrupt the housing market. The main components and costs of the programme include: governance; business improvement; people, culture and values; a digital strategy; communications and engagement; and an accommodation review. Costs incurred are administration in nature as they inform the implementation of strategic choices. From 2020/21, these choices have been implemented and the charges incurred are considered to be Programme in nature. They have been allocated to the line ‘Homes England Transformation Programme in Note 7.

Administration costs in 2019/20 have been reanalysed and where appropriate reclassified from other headings, in order to better reflect the nature of transactions. In particular amounts disclosed in 2019/20 as Taxation Not Recoverable (£3.5m), Depreciation and amortisation (£4.3m), and Property, plant and equipment impairment reversals (£0.3m credit) have been reclassified to the Tax and Depreciation Line. Additionally, amounts disclosed in 2019/20 as Learning and Development (£1.4m), Restructuring Costs (£0.1m), and Board Member’s remuneration (£0.3m) have been reclassified to the Learning, Development and Staff line.

Included above are restructuring costs totalling £98,000 (2019/20: £137,000).

10 Other operating income[***]

	Note	2020/21 £’000	2019/20 £’000
Homeowner fees	14f	27,043	18,213
Grant clawback		19,625	19,548
Rent and property income		6,384	6,545
Other		6,645	4,287
		59,697	48,593

Homeowner fees represent income due from homeowners who have acquired a home via the Help to Buy loan equity scheme. At the fifth anniversary of ownership, a fee is due, calculated as 1.75% of the loan outstanding. As more Help to Buy homeowners reach the 5 year anniversary, fees will continue to increase.

Grant clawback mostly comprises grant recovered from Registered Providers of Social Housing via the Affordable Homes Programme. Clawback may arise where the recipient of grant funding does not meet the conditions set out in the grant agreement resulting in recovery.

Other includes income from investments, income charged to the Regulator of social housing (RSH) in respect of services provided, planning windfall income (where a developer buys land which subsequently receives planning permission increasing its value and the Agency shares in this uplift in value) and other windfall income (where the legal restriction on land sold is varied resulting in income to the Agency).

11 Share of profits of associates and joint ventures[***]

The aggregated amounts of the Group’s share of results of associates and joint ventures (JVs) included in the Statement of Comprehensive Net Expenditure is as follows:

	2020/21 £’000	2019/20 £’000
Share of results of associates	(3,240)	4,138
Share of results of joint ventures	1,567	569
Share of profits/(losses) of associates and joint ventures	(1,673)	4,707

The aggregate share of results is the net profit or loss from continuing operations. There was no profit or loss from discontinued operations and no other comprehensive income was recognised in the year.

12 Income tax[***]

a) Tax charge/credit in net expenditure comprises

The Agency is subject to Corporation Tax on all its activities except those related to grant payments.

b) Tax charge/credit on items in other comprehensive expenditure comprises

c) Reconciliation of tax charge

13 Investments in subsidiaries, associates and joint ventures[***]

a) Subsidiary undertakings – Agency

During the year, the Agency held interests in the following subsidiaries, each of which are registered in England and Wales and are wholly-owned by the Agency:

The property management companies are held as non-profit making entities to manage shared costs. Other than English Partnerships (LP) Ltd, all of the remaining investment holding companies are dormant.

b) Associated undertakings and joint ventures – Group and Agency

The aggregated movements in the Group’s share of net assets of associates and joint ventures (JVs) are as follows:

In 2020/21 £4.1m (2019/20 £3.2m) was received in dividends from group companies and treated as redemptions under the equity method per IAS 28.

In 2020/21 £4.1m (2019/20: £3.8m) was re-invested by the Group into English Cities Fund from amounts previously repaid to the group and a further £nil (2019/20: £18.5m) invested from the additional £25.0m commitment which was made available in 2017/18. There have been £23.5m repayments of this funding made during 2020/21 (2019/20: £nil).

The aggregated amounts of the Group’s share of net assets and liabilities of associates and JVs are as follows:

During the year, the Group had interests in the following associated undertakings and joint ventures, all of which are registered or resident in England and Wales:

[^] Joint venture

[*] During the year, Kier Group made the decision to dispose of Kier Living Limited. Kier Living Limited is an investment partner in Kier Community Living LLP. As at 31 March 2021, Kier Living Limited remained part of Kier Group.

The Agency’s interest in English Cities Fund Limited Partnership (ECF) represents the partner profit share arrangements, which entitles the Agency to a 45.78% share of the net profits or losses of the Partnership. The Agency’s Chief Investments Officer represents the Agency’s interest on the Board of ECF.

c) Commitments for associated undertakings and joint ventures – Group and Agency

The Agency has made a £5.0m (2019/20: £5.0m) working capital facility available to Countryside Maritime Limited, of which £nil (2019/20: £nil) was drawn at 31 March 2021. In 2017/18, the Group committed to invest a further £25.0m into English Cities Fund. During 2020/21, £16.4m has been drawn down from this additional commitment (2019/20 £18.5m).

14 Financial assets[***]

	Note	Fair value £’000 2020/21	Amortised cost £’000 2020/21	Total £’000 2020/21	Fair value £’000 2019/20	Amortised cost £’000 2019/20	Total £’000 2019/20
Cash and cash equivalents	a)	–	262,541	262,541	–	218,868	218,868
Trade & other receivables	b)	208,379	335,317 5	543,696	171,411	127,678	299,089
Financial asset investments	c)	17,930,324	1,497,943	19,428,267	14,847,542	1,376,338	16,223,880
		18,138,703	2,095,801	20,234,504	15,018,953	1,722,884	16,741,837

a) Cash and cash equivalents – Group and Agency

The Agency draws Grant-in-Aid from MHCLG on a monthly basis, being received on the 8th working day. At 31 March, the Agency therefore held cash balances as shown above to enable it to meet its short term cash requirements until receipt of the next instalment of Grant-in-Aid.

The cash figure takes account of BACS payments initiated by 31 March 2021 to settle short-term liabilities, but not cleared by 31 March 2021. These payments totalled £53.9m (2019/20: £55.7m) and cleared the bank in early April 2021. There were no cash equivalents at any of the reporting dates shown.

Cash held with third parties covers amounts retained by external legal firms and a loan collection Agency. Cash is held to Homes England’s order.

b) Trade & other receivables – Group and Agency

Land sale receivables

Land sale receivables are measured with reference to the underlying agreement. In the majority of cases the inclusion of an overage clause within the land sale agreement requires the receivable to be measured at Fair Value Through Profit or Loss (FVTPL). Where the contractual terms give rise to cash flows that are solely payments of the principal amount these are measured at Amortised Cost.

Direct Commissioning

Direct Commissioning receivables represent amounts due from unit sales and accrued income due under contracts to develop multiunit properties from projects managed under the Direct Commissioning programme. They are measured at amortised cost.

Other receivables

Other receivables held at FVTPL relate to home equity management fees and interest. The remainder of other receivables are held at amortised cost and include trade receivables, VAT, prepayments and other receivables.

Credit risk of trade and other receivables classified to FVTPL

The Agency is exposed to credit risk in relation to trade and other receivables measured at FVTPL. The credit risk exposure at the year end is £208.4m.

c) Financial asset investments – Group and Agency

Investments measured at Fair Value

Financial assets measured at Fair Value through Profit or Loss are stated at fair value in accordance with International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13) and relate to the following:

• PRS REIT: An investment in shares issued by the PRS REIT plc, supporting the launch of the first quoted Real Estate Investment Trust to focus purely on the private rented sector.
• The Agency’s entitlement to future income arising from financial assistance provided to homebuyers to enable them to buy homes, the majority of which arises from the Help to Buy scheme.
• Development, Infrastructure and Other Loans: There are a number of loans which are measured on a fair value basis under the level 3 hierarchy as they do not clearly meet the requirements under IFRS 9 to be described as basic lending arrangements. Development Loans have been made to private sector developers in order to bring forward the development of housing under the Home Building Fund. Infrastructure Loans have been made to private sector developers and Local Authorities in order to fund infrastructure on stalled sites, or to unlock potential development sites under the Home Building Fund. Other Loans mainly relate to commercial nonsite specific loans, such as corporate type facilities.
• Development, Infrastructure and Other Equity and City Deals: Investments in development and infrastructure projects under which the Agency benefits from variable returns based on income generated by the project funding, including projects with both the private sector and Local Authorities, some of which have arisen under City Deals entered into to support the Government’s aim of promoting localism.
• Managed Funds: Investments in Housing Growth Partnership, operated by Lloyds Banking Group.
• Overage: Future receipts due from the disposal of land to third parties, where the Agency includes contractual provisions in line with Managing Public Money to protect the public interest by requiring additional overage payments to be made where developments are more profitable than envisaged when the initial disposal consideration was agreed.

Assets measured at Fair Value through Profit or Loss are carried at fair value, using the valuation methods described in Note 15. Following initial recognition, all movements in the fair value of these assets are recognised in net expenditure. On disposal of the related assets, the net difference between proceeds and the carrying value of the asset is recognised in net expenditure.

Investments measured at Amortised Cost

These assets are measured at amortised cost where they meet the criteria of Solely Payments of Principal and Interest (SPPI) and therefore meet the requirement to be described as a basic lending arrangement under IFRS 9.

Development Loans have been made to private sector developers in order to bring forward the development of housing under the Agency’s programmes, including the Home Building Fund, Get Britain Building, Builder’s Finance Fund and Build to Rent. These loans are repayable during periods ranging up to 2033. Infrastructure Loans have been made to private sector developers and Local Authorities in order to fund infrastructure on stalled sites, or to unlock potential development sites. These loans are repayable during periods ranging up to 2036. Other loans include £26.2m of loans made to utility companies (2019/20: £26.8m) in respect of water infrastructure for new town developments (due for redemption by 2053), £5.4m loans made to Local Authorities (2019/20: £8.1m) which are repayable during periods ranging up to 2034 and loans made of £4.1m in respect of City Deals (2019/20: £1.2m) which are repayable within 12 months.

d) Movements in financial asset investments measured at Fair Value – Group and Agency

[*] Loans measured at Fair Value Through Profit or Loss (FVTPL) because the contractual terms of the loan do not give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding.

Significant reclassifications

During the year, there were three loan investments identified which were classified as fair value through profit or loss in the prior year but which would be more appropriately measured on an amortised cost, as a result of the assets meeting the definitions of Solely Payments of Principal and Interest (SPPI) under IFRS 9. This was treated as an in-year adjustment in 2020/21 as a result of the reclassification not being material to the Agency’s financial statements. The total remaining cost of these assets at 31 March 2020 was £11.99m, with net fair value uplifts to 31 March 2020 of £0.5k having been adjusted through fair value movements in 2020/21. In 2019/20, there were two assets reclassified from loans measured at amortised cost to fair value through profit or loss. The total remaining cost of these assets at 31 March 2019 was £9.6m. There was also interest capitalised to 31 March 2019 of £0.4m which was adjusted through capitalised interest in 2019/20.

Sensitivity of the valuation of assets held at fair value under the level 2 and level 3 hierarchy

The valuation of the Agency’s equity-loan mortgage portfolio is highly sensitive to changes in assumptions, in particular about market prices. Analysis showing the sensitivity of the portfolio valuation of these assets to market prices is shown in Note 16. The sensitivity of the Help to Buy valuation to the Agency’s modelling assumptions is analysed in Note 17a. In addition, an assessment has been undertaken in relation to the potential impact of COVID-19 on key judgements and assumptions. This is presented in Note 2.

As described in Note 15, the investments categorised under the level 3 fair value hierarchy are not homogeneous in nature, therefore the underlying inputs used within the calculation of fair value vary depending on the nature of the asset. This category of assets is therefore sensitive to a range of underlying inputs which are not necessarily common across the level 3 portfolio.

A sensitivity analysis has been performed in Note 16a to demonstrate the impact of an increase or decrease in development returns. In addition, a sensitivity analysis has also been performed to demonstrate the impact of potential movements in development land values as a result of COVID-19 on level 3 asset valuations, which is disclosed in Note 2.

Level 3 comprises investments which can be further analysed as follows:

Credit risk of loans classified to Fair Value through Profit or Loss (FVTPL)

The Agency is exposed to credit risk in relation to loans classified to Fair Value through Profit or Loss (FVTPL). The credit-risk exposure at 31 March 2021 in relation to these investments is £471.1m.

e) Movements in financial asset investments measured at Amortised Cost – Group and Agency

[*] Gross balances exclude Expected Credit Loss Allowances and interest accrued but not yet added to loans, but include the effect of amounts which have been considered to have been written-off as irrecoverable or which have been recognised as modification gains or losses where an agreement has been varied. Net balances include the effect of applying Expected Credit Loss Allowances. **Interest accrued but not yet capitalised of £nil was written off during 2020/21 (£1k in 2019/20) and contributes to the overall impairment charge recognised (Note 14f).

Sensitivity of Expected Credit Losses to modelling assumptions

IFRS 9 requires an Expected Credit Loss allowance calculation to be performed with reference to the level of credit risk and performance of each investment. The determination of the risk associated with each asset is a key judgement by management as the result determines whether a 12-month loss allowance or a lifetime loss allowance is calculated for that asset. The Expected Credit Losses are calculated by comparing the estimated balance at the time of default against moderated security values (calculated by applying Modified Security Value percentages (MSVs) to gross security values to estimate the likely value which might be realised from a sale of security in distressed circumstances). A minimum loss on default value of 35% is applied (see accounting policies – Loss Given Default (LGD) Floor). This is then multiplied against an associated Probability of Default percentage value (PD) for the relevant loss calculation period. The PD value applied is determined based on the Credit Risk Rating of the associated asset using industry metrics for default.

In addition to calculating either 12-month or lifetime loss allowances, IFRS 9 also requires consideration of how the calculation would vary under alternative economic scenarios. The Agency achieves this by varying the application of PD assumptions to the same base loan data. In addition, the Agency varies the MSVs applied to the ECL allowance calculation performed under each economic scenario, to reflect the relative expected discount on gross security values in a distressed situation for each economic scenario. The results calculated for each scenario are then used to calculate an unbiased, weighted-average loss allowance. This is done by using the relative likelihood of each scenario, based on the Agency’s view of their relative probability.

The Expected Credit Loss model is highly sensitive to the modelling assumptions noted above, which are therefore considered to be a key judgement of management. To analyse the impact of the key assumptions applied at 31 March 2021, a sensitivity analysis has been performed in Note 17b, which also provides an overview of the key modelling assumptions and how they are applied.

f) Summary of movements recognised in consolidated net expenditure in relation to financial assets

There have been net fair value gains on financial assets measured at FVTPL and impairments of financial assets measured at FVTPL. This is because movements in fair value are assessed and disclosed at an individual asset level.

Gain / (loss) on disposal of financial asset investments

Credit impairment loss charges to Net Expenditure in relation to assets held at Amortised Cost

g) Write-offs at the reporting date

Movement in write-off allowances during 2020/21

Further details of how the Agency identifies assets for which a write-off is required are disclosed in the Annual Report on page 105. This also includes details of loan balances over £300k which have been considered to be irrecoverable and which are written-off in accordance with IFRS 9, or where the Agency has received authorisation from HM Treasury during the current year to cease pursuing the debt.

Movement in write-off allowances during 2019/20

h) Movement in Expected Credit Loss (ECL) allowances during the reporting period

[*] Where amounts are considered to be irrecoverable they are written-off (or expensed as modification losses where this arises as the result of changes to contractual terms) and the associated Expected Credit Loss allowance is released. As a result, the charge to Net Expenditure at this time is limited to the difference between the actual amount written-off and the Expected Credit Loss allowance carried at the point of write-off.

[**] For reasons of practicality and efficiency, all movements in the ECL allowance for short-term receivables (which are calculated by applying a simplified approach based on historic losses observed in the population, as allowed under IFRS 9) are disclosed in a single line.

[***] During 2020/21, there were three loan investments which were previously measured on a fair value basis which were reclassified in year and are now measured at amortised cost. On reclassification, the Expected Credit Loss allowance of £0.1m was recognised.

Expected Credit Loss allowance analysed for disclosure against loan categories

During 2020/21, the Economic Scenarios, Weightings and Probability of Default values applied in the Agency’s Expected Credit Loss model were revised with reference to current market conditions and future expectations. The change in assumptions has resulted in a decrease in the Expected Credit Loss allowance of £32.0m during the year. Details of the assumptions adopted are set out in Note 2.

15 Financial assets and financial liabilities: Fair value and amortised cost[***]

The fair values of financial assets are assessed at least annually to meet the reporting requirements of IFRS 9 and are determined as follows:

Level 1

The fair value of the Agency’s shareholding in the PRS REIT plc is calculated with reference to prices quoted on the London Stock Exchange and is therefore categorised as level 1 in the fair value hierarchy as defined by IFRS 13.

Level 2

The fair values of assets held at Fair Value through Profit or Loss relating to the Agency’s equity-loan mortgage portfolio are calculated with reference to movements in the ONS house price index (UK HPI) at a regional level, being the most relevant available observable market data. This is supplemented by adjustments for experience of actual disposals since the inception of the schemes which consider geography, age and property type. These experience adjustments are observable as they are developed using publicly available market and transaction data. Therefore these fair values are categorised as level 2 in the fair value hierarchy as defined by IFRS 13.

Level 3

The fair values of assets held at Fair Value through Profit or Loss relating to managed funds, equity investments in development / infrastructure projects and overage follow the income approach under IFRS 13. With the exception of one equity investment which is measured using Net Asset Values (NAV) (this relates to the Agency’s investment into an unlisted shared ownership fund managed by M&G Real Estate. The carrying value of this investment was £2.9m at 31 March 2021), the fair value of all other level 3 assets are calculated using project-level cash flow forecasts, discounted at rates set by HM Treasury, or the effective interest rate of the underlying loan agreement for loans at FVTPL if higher. This approach is as prescribed by the Government Financial Reporting Manual, issued by HM Treasury. This reflects the valuation methodology which would be employed by market participants when pricing the assets and, since the inputs which inform the calculation of fair value are unobservable to users of the accounts, the assets are categorised as level 3 in the fair value hierarchy as defined by IFRS 13.

The nature of the investments disclosed within this category vary in nature, as the Agency tailors the type of support or funding available to the individual situation. The nature of investments categorised within the level 3 category is summarised in Note 14c. In addition, the mechanism by which the Agency obtains returns on these investments are specific to the asset. For example, the Agency may be due a share of returns from a development project, or the Agency may be due a share of profit which is determined based on the underlying performance of an investment. As a result of this, the inputs used to determine the fair value of each individual asset vary in nature. Input data can include project-level cash flows which are either provided by counterparties and moderated by the Agency’s project managers or are obtained via independent valuation or monitoring reports from professional advisers (for individually significant assets).

The fair value of other financial instruments (including liabilities, where significant and long-term) are similar in nature to other level 3 assets and are calculated by discounting their future cash flows using discount rates set by HM Treasury, or the rate intrinsic to the financial instrument if higher. For financial assets, this results in classification as level 3 in the fair value hierarchy as defined by IFRS 13.

No financial assets have moved between categories during 2020/21 (2019/20: None).

Measuring fair value on recognition

Where differences between the fair value at initial recognition, as calculated using the methods described above, and the price paid by the Agency to acquire the instrument are considered to be significant they are either:

• recognised as grant expenditure where fair value is considered to be below cost, in accordance with IAS 20 Government Grants; or
• deferred and released over the expected life of the instrument in accordance with IFRS 9 Financial Instruments.

Changes in aggregate gains yet to be recognised in net expenditure are as follows:

Comparison of cost and carrying value – Group and Agency

The original cost and carrying values of the Agency’s financial assets, by classification, are as follows:

Prepayments, tax and social security balances are excluded from the table above as these are non-financial assets. There are no differences between the carrying values and fair values of the Agency’s financial liabilities, which are as follows:

Deferred income, tax, social security and certain provisions are excluded from the table above as these are non-financial liabilities.

16 Financial risk management[***]

The Group and Agency’s financial assets and liabilities are detailed in Notes 14 & 19. The statements in this note apply to both the Agency itself and the Group, except where indicated.

The exposure to financial risk arising from financial assets is a key focus for management. In order to mitigate this risk, the Agency adopts the following approach to transactions with developers:

• Potential exposure to credit risk is subject to a level of analysis which would be seen in UK financial institutions, which includes the consideration of aggregated exposures where applicable.
• For existing recoverable investments, cash flows are managed monthly based on client’s agreed cash flows for drawdowns.
• When selling property the Agency is normally secured by use of a Building Lease giving the right to retake possession of the disposed property in the event of a default by the buyer.
• Loan and equity agreements are generally backed by a charge on land, parent company guarantees or other available security as appropriate to the individual circumstances. These are subject to individual review and structuring.

a) Market price risk

The Agency’s results and equity are dependent upon the prevailing conditions of the UK economy, especially UK house prices, which significantly affect the valuation of the Agency’s assets.

In particular, the Agency is exposed to significant market price risk in its equity-loan mortgage portfolio and land portfolio. Any market price movements are reflected in net expenditure for the period.

The Agency accepts market price risk as an inherent feature of its operation of Help to Buy and other home equity schemes. It therefore does not attempt to directly mitigate this risk, for example via hedging, but monitors the exposure at a strategic level using a range of scenario analysis techniques such as that described below.

The Agency has performed a sensitivity analysis that measures the change in fair value of the financial assets held for hypothetical changes in market prices. The sensitivity analysis is based on a proportional change to all prices applied to the relevant financial instrument balances existing at the year end. Stress-testing is performed which looks at exposure to adverse scenarios to ensure that the financial risks are understood.

Home Equity Portfolio

The table below shows the effect on net expenditure arising from movements in the fair value of these portfolios at 31 March 2021, before the effects of tax, if UK house prices had varied by the amounts shown and all other variables were held constant. This illustrates the impact of the mortgage providers’ first charge, which disproportionately affects the estimated fair value when house prices reduce.

Private sector developments, overage and infrastructure

At 31 March 2021, if development returns had been 10% higher/lower and all other variables were held constant, the effect on the Agency’s net expenditure arising from movements in investments in private sector developments and infrastructure projects, before the effects of tax, would have been an increase/decrease of £21.0m/£21.0m from that stated.

Land portfolio

The table below shows the effect on net expenditure at 31 March 2021, before the effects of tax, if at 31 March 2021 average land and property prices had varied by the amounts shown and all other variables were held constant. This illustrates the lower of cost and net realisable value principle whereby impairments will only be recognised when an asset falls below its cost base and impairment reversals will only be recognised to the extent the asset has previously been impaired.

b) Interest rate risk

The Agency’s income is exposed to interest rate risk on its financial assets classified as loans and receivables, where these pay interest at a variable rate. For the majority of the Agency’s loan portfolio, the variable element is the EC Reference Rate (0.11% as at 31 March 2021).

The going concern of the Agency is not affected by a reduction in interest income in the event of a reduction in variable interest rates and the Agency does not undertake any specific measures to mitigate against the risk of changes in variable interest rates.

If interest rates on the Agency’s variable rate loans had been 1% higher/lower throughout the year ended 31 March 2021, the Agency’s net expenditure for the year, before the effect of tax, would have been £17.1m/£17.1m lower/ higher.

c) Liquidity risk

Liquidity risk is the risk that the Agency will be unable to meet its liabilities as they fall due. To the extent that the Agency’s liabilities cannot be met from its own sources of income, they may be met by future grants or Grant-in-Aid from the Agency’s sponsoring department, MHCLG. Such grants are paid on a monthly basis to fund net liabilities as they are expected to fall due. Short term liquidity is managed through the investment of any cash surpluses with the Government Banking Service.

The Agency does not allow the use of more complex financial instruments, which could result in increased financial liabilities, such as derivatives.

Substantially all of the Agency’s financial liabilities (as described in Note 19) are contractually due within one year of the reporting date.

d) Currency risk

The Agency’s dealings are almost entirely Sterling denominated, and therefore the Agency has no material exposure to currency risk.

e) Credit risk

Credit risk is the risk of financial loss where counterparties are not able to meet their obligations. The Agency’s maximum exposure to credit risk, without taking into account any security held, is the same as the carrying amount of financial assets recorded in the Financial Statements, as disclosed in Note 14.

The nature and concentration of the credit risk arising from the Agency’s most significant financial assets is demonstrated in the tables below.

Financial asset investments measured at fair value relate mainly to amounts receivable individually from proceeds generated when the equity-loan mortgage portfolio properties are sold or staircased, or amounts receivable from various private sector developers, resulting in a broad spread of credit risk for these assets. Amounts receivable from the owners of homes are secured by a second charge over their property.

Analysis of Development Loan Exposure by Counterparty at 31 March 2021

The chart ‘Percentage of Total Development Loans’ has been removed as it could not be made accessible. Please contact webaccessibility@homesengland.gov.uk citing the name of the document if you need this information.

Analysis of Infrastructure Loan Exposure by Counterparty at 31 March 2021

The chart ‘Percentage of Total Infrastructure Loans’ has been removed as it could not be made accessible. Please contact webaccessibility@homesengland.gov.uk citing the name of the document if you need this information.

[*] The balances analysed above for Development Loans, Infrastructure Loans and Other Loans include both loans measured at amortised cost and loans measured on a fair value basis. The exposures are before the application of the Expected Credit Loss allowance. The balances do not include capitalised fees and the effects of unwinding deferred income in relation to fees recharged to developers, with a net effect of £15.1m.

Analysis of Other Loan Exposure by Counterparty at 31 March 2021

The chart ‘Percentage of Total Other Loans’ has been removed as it could not be made accessible. Please contact webaccessibility@homesengland.gov.uk citing the name of the document if you need this information.

Analysis of Total Loan Exposure by Counterparty at 31 March 2021

The chart ‘Percentage of Total Loans’ has been removed as it could not be made accessible. Please contact webaccessibility@homesengland.gov.uk citing the name of the document if you need this information.

Analysis of Receivables due from Disposal of Land and Property Exposure by Counterparty at 31 March 2021

The chart ‘Percentage of Total Land and Property Receivables’ has been removed as it could not be made accessible. Please contact webaccessibility@homesengland.gov.uk citing the name of the document if you need this information.

The Agency’s cash is generally held with the Government Banking Service, except where commercial reasons necessitate otherwise, for example when cash is held by solicitors around completion of property sales or purchases or by the Agency’s mortgage administrator pending allocation to accounts.

There are no significant concentrations of credit risk in the Agency’s other financial instruments.

For all financial assets excluding cash, the maximum exposure to a single counterparty at 31 March 2021 was £251.3m (2019/20: £212.4m), and the five largest counterparties accounted for 3.3% of the total financial assets balance of £20,202m (2019/20: 3.6% of £16,506m).

Credit policies

Credit policies are developed which set the context of the appetite for risk, requirements for risk assessment (both at the outset and through the cycle of facilities provided) and the operational aspects of managing the overall risk profile. Details are provided in the Agency’s accounting policies (Note 1).

Assessment of significant increases in credit risk

Individual loans are actively managed by dedicated project managers and are subject to ongoing review, enabling the Agency to react to early warning signs and to continually assess the relevant IFRS 9 stage for Expected Credit Loss (ECL) allowances. This enables the Agency to consider the need for more intensive management to protect the exposure or if needed undertake a structure review to consider whether a write-off allowance is required. Forbearance is considered as part of any assessment and review of the customer risk rating during the term of facilities. This ensures that data which informs the ECL allowance calculation appropriately reflects current credit risk characteristics of the portfolio of investments.

All assessments and approvals are operated within a structured approval delegation matrix from HM Treasury and MHCLG.

Where term loans are issued, it is often sensible to apply an assumption that any missed monthly repayments which are not remedied within a 30-day timeframe are indicative of a significant increase in credit risk. However, because the Agency does not issue term loans with monthly repayment terms and loans are usually repayable either on development milestones or in full at a contractual long-stop date, the 30-day measure is not considered to be helpful as an indicator of significant increases in credit risk for the Agency’s loan portfolio.

Credit profile of investments

Of the total gross amortised loans cost exposures of £1,521m at 31 March 2021 (£1,423m at 31 March 2020) excluding capitalised fees and the effects of unwinding of deferred income, with the net effect of £15.1m, £738m (2019/20: £754m) were categorised with a Credit Risk Rating (CRR) between 1 to 4 (low risk), with £665m (2019/20: £481m) of exposures being categorised as CRR 5 to CRR 6 (medium risk). £118m (2019/20: £188m) of loan exposures were categorised as CRR 7 or above (high risk or in default).

The chart ‘Credit profile of investments’ has been removed as it could not be made accessible. Please contact webaccessibility@homesengland.gov.uk citing the name of the document if you need this information.

Collateral held as security for financial asset investments

Collateral is usually obtained as security against default. The primary sources of collateral are often land which is being developed with the aid of the investment finance, but they can be other land assets within the control of our counterparties or their parent group. Parent company guarantees are also employed. For the Expected Credit Loss calculation, only land and property security values are included, with an average base MSV adjustment of 53% for land and property applied to reflect reduced values which might reasonably be expected in a distressed sale. Because security values often relate to land under development, security values are modelled based on up-to-date information to take account of factors such as site expenditure and realised sales.

The Agency held gross collateral values against loans totalling £7,756m at 31 March 2021 (£8,054m at 31 March 2020), the majority of which related to security over land and property assets held by third parties (£7,486m). The modified value of this security value after applying Marginalised Security Value adjustments under the central economic scenario was £3,844m at 31 March 2021 (£3,495m at 31 March 2020).

Of the total exposures relating to loans measured at amortised cost of £1,520m, £1,304m (85.8% of agreements) were fully covered by gross land and property security values held in relation to those investments. There were 39 exposures (14.2% of agreements) totalling £216m at 31 March 2021 where gross security values held were less than the exposure at that date. The total gross security values held for these investments was £52m at 31 March 2021 (£28m after applying Marginalised Security Value adjustments under the central economic scenario). Of these 39 investments, there were 25 investments (10.2% of agreements) with a gross exposure value of £154.7m where no security is held. The majority of these agreements are legacy agreements and relate to loans with other Government bodies. The total gross value of loans measured at amortised cost which were credit impaired at 31 March 2021 was £37.5m. The Agency held gross land and property security values of £77.7m (£35.7m of net security values after applying Marginalised Security Value adjustments under the central economic scenario) against these assets at 31 March 2021. The Agency held total gross land and property security values of £695.1m (£357.0m of net security values after applying Marginalised Security Values) against loan assets measured at Fair Value at 31 March 2021.

17 Sensitivity of Significant Valuation Modelling Assumptions[***]

a) Help to Buy

Homes England models the fair value of Help to Buy on the basis of the estimated proceeds that would be achieved were all homeowners to redeem their equity loans on the reporting date. Homes England considers these estimated proceeds to be a significant accounting estimate, because the fair value of the portfolio is highly sensitive to market price risk as set out in Note 16. In addition, the estimate is sensitive to significant assumptions that Homes England makes within the valuation model. We have disclosed below the individual impact of the assumptions that currently have a material impact on the estimates. Other assumptions within the valuation model, including estimated rates of first charge mortgage arrears and discount to sales on repossession, do not have a material impact at present, but could do if there was a significant decrease in house prices.

Assumptions of market adjustments

Office for National Statistics House Price Indices (UK HPI) – which are used by Homes England to estimate the effect of house price inflation over time – are based on all market activity. Help to Buy is only available on newbuild properties purchased with a mortgage, and redemptions can occur via staircasing as well as by sale. This means that the market price of the property on redemption may differ from that estimated by HPI alone. Homes England therefore makes regional and property type market adjustments using its accumulated experience of gains and losses on disposals across different redemption transaction types to allow for these differences. These assumptions have a significant effect on the fair value because they modify the expected market price of properties from which Homes England’s percentage share is calculated.

The table considers how the portfolio valuation would vary with 1% changes in the adjustments applied

Assumptions of expected proportions of transaction types

Help to Buy is redeemed at the earlier of the sale of the property, or when the homeowner staircases the equity loan with a payment equivalent to Homes England’s share of the current estimated value of the property (as determined by a Chartered Surveyor). Homes England applies regional assumptions based on its accumulated experience to estimate the proportion of its portfolio that will be redeemed by each of these two redemption types. These assumptions have a significant effect on the estimated fair value because the proceeds recovered via a sale may be reduced by the balance due to the first charge mortgage lender and because different transaction types are observed to generate differing returns (as reflected in the regional market adjustments applied).

The table considers how the portfolio valuation would vary with changes in the expected proportions of transaction types

Combined impact of assumptions

The assumptions applied by Homes England will interact with each other in different economic scenarios. For example, a 15% point fall in house prices might lead to both a 10% point increase in staircasing transactions (relative to sales) and a 7.5% increase in accounts in arrears (of which 1.5% might be an increase in accounts likely to be reposessed) . In this situation the Agency would model a fair value of £14,051m: a reduction of £3,002m or 17.6% on the base assumption.

The graph below illustrates a potential spread of fair value from the combined impact of assumptions at different market prices. The upper and lower bounds correspond to assumptions within the following ranges:

• Market adjustments between 2% lower and 2% higher than the base assumptions.
• Proportion of transaction types between 100% sales and 100% staircasing.
• Mortgage arrears rates ranging from no arrears to a 7.5% increase on the base assumption.
• Discounts on repossession between 15% lower and 15% higher than the base assumption.

For example, the lower bound corresponds with a 2% increase in market adjustment, a 7.5% increase in accounts in arrears, and 15% increase in discount on repossession. Each bound has been calculated by selecting the value which is furthest from the base assumption for each of the 100% sales and 100% staircasing scenarios.

The combined impact of assumptions generates a spread in estimated fair value of £1.85bn at current market prices. This spread would increase in a falling market, reaching approximately £7.5bn should market prices fall by 30%. The combined impact of assumptions is therefore more sensitive in a falling market. This is primarily due to the impact of the mortgage providers’ first charge, which disproportionately affects the estimated fair value when house prices reduce.

The graph ‘potential spread of fair value from the combined impact of assumptions at different market prices’ has been removed as it could not be made accessible. Please contact webaccessibility@homesengland.gov.uk citing the name of the document if you need this information.

b) Expected Credit Loss allowance

Following the requirements of IFRS 9, the Agency is required to calculate an Expected Credit Loss allowance for Financial Assets measured at Amortised Cost. A summary of the calculation is provided in Note 14e. Due to the complex nature of the Expected Credit Loss methodology, the calculation is highly sensitive to some key judgements and assumptions.

The impact of the assumptions applied in the Expected Credit Loss calculation has been considered and the different assumptions have a varying impact on the results of the calculation.

There are two assumptions which have a trivial impact on the Expected Credit Loss allowance which are summarised as follows:

Timing of default events: The calculation of the Expected Loss Allowance at 31 March 2021 assumes that default events would occur at a mid-point of the year for each future calculation date, to build in an unbiased assumption that a default could happen at any point during a future year. This creates variation in the estimate because of the effect of discounting, which will be greater for losses modelled at a later point in the year. If a default event were assumed to occur at the beginning or end of a year, this would increase or decrease the loss allowance by £923k (2.3%).

Profile of forecast expenditure and receipts within years: Forecast loan balances must be calculated into the future to determine the Loss Given Default (LGD) of each asset (calculated as exposure at default less modified security values). Expenditure and receipts data is available at an annual level for future years within the Agency’s systems, whereas future balances are calculated at quarterly intervals. As a result, an assumption has been applied within the model to apportion spend and receipts over all future quarters using historic data on actual expenditure and receipt profiles. If it had been assumed expenditure and receipts were to be profiled equally over the year, this would have decreased the loss allowance by £414k (1.0%) at 31 March 2021.

Estimates of the impact of key assumptions on the Expected Credit Loss allowance calculation at 31 March 2021 are provided below.

Economic Scenarios and Scenario Weighting assumptions

IFRS 9 requires the Agency to consider alternative economic scenarios in the calculation of the Expected Credit Loss allowance. For each identified economic scenario, variations are made to the Probability of Default values applied based on an individual investment’s Credit Risk Rating. Weightings are applied to the Expected Credit Loss calculation for each scenario, determined in relation to the probability of each scenario occurring, with reference to current market and credit risk expectations. At 31 March 2021, the Agency applied three economic scenarios: a base case central scenario, a downside scenario and an upside scenario. Further details in relation to these scenarios are summarised in Note 1 & Note 2. At 31 March 2021, a 70% weighting was applied to the base case scenario, a weighting of 15% to the downside scenario and a 15% weighting to the upside scenario calculation.

The impact of varying these weightings is analysed below:

The table considers how the Expected Credit Loss allowance would vary with alternative scenario weightings applied:

Probability of Default (PD) assumptions

PD values are determined with reference to current economic conditions; however for alternative scenarios the PD values are migrated to adjust the PD % values against each Credit Risk Rating. The PD values are applied to each asset in relation to their CRR. The PD values applied to alternative scenarios have a significant impact on the calculation of the Expected Credit Loss allowance. To illustrate the sensitivity of the estimate to this data, the impact of a one level downgrade / upgrade in PD values assigned to each Credit Risk Rating value across each of the scenarios is analysed below:

The table considers how the Expected Credit Loss allowance would vary with a change to the probability of default assumptions

Moderated Security Value (MSV) assumption

To reflect the expected value which might reasonably be realised from the sale of security in the event of default, MSV percentages are applied to gross security values to determine a measure of Loss Given Default (when compared against the estimated exposure on default). The MSVs are varied depending on the type of security held. A lower MSV percentage results in a higher discount applied to the determined security values. The analysis below illustrates the sensitivity of the estimate to a decrease / increase in MSV values determined for each economic scenario by ten percentage points. At present, this only has a limited impact on the ECL due to the effect of the loss floor assumption applied in the Agency’s modelling methodology (see below).

The table considers how Expected Credit Loss allowance would vary with changes to the MSV values

Loss Floor

A minimum percentage value has been applied to the LGD calculation with reference to individual investments (see accounting policies – Loss Given Default (LGD) Floor). At 31 March 2020 and 31 March 2021 the LGD floor applied was 35%. In order to demonstrate the sensitivity of the calculation of Expected Credit Loss allowances to the LGD floor assumption, alternative floors of 0%, 50% and 75% have been applied to the calculations with results summarised below.

The table considers how the Expected Credit Loss allowance would vary with a change in the Loss Floor

Combined impact of assumptions

The sensitivity analysis performed above has focused on changing one assumption in turn, with all other metrics remaining in line with the assumptions applied in determining the Expected Credit Loss allowance as at 31 March 2021.

However to consider the impact of several assumptions changing, an analysis has been performed to establish the impact if the key assumptions above (excluding scenario weightings) were changed within reasonable limits to consider the highest and lowest possible Expected Credit Loss allowance. The upper and lower bounds correspond to assumptions within the following ranges:

• PDs downgraded by one level (upper bound) and upgraded by one level (lower bound).
• MSVs decreased by ten percentage points (upper bound) and increased by ten percentage points (lower bound) across all three scenarios.
• Increase in loss floor to 75% (upper bound) and decrease in loss floor to 0% (lower bound).
• Assuming default events occur at the beginning of the year (upper bound) and at the end of the year (lower bound).
• Assuming all spend occurs at the beginning of the year and all receipts at the end of the year (upper bound) and assuming all spend occurs at the end of the year and all receipts at the beginning of the year (lower bound).

A variation has then been applied to the scenario weightings against the highest and lowest Expected Credit Loss positions in order to consider the impact of these variations in combination with all other assumptions changing.

The graph showing the lower and upper bounds has been removed as it could not be made accessible. Please contact webaccessibility@homesengland.gov.uk citing the name of the document if you need this information.

18 Land and property assets – Group and Agency[***]

	Note	2020/21 £’000	2019/20 £’000
Net book value at 1 April		998,074	839,084
Additions		317,730	357,311
Disposals	6	(137,905)	(152,807)
Impairments		(67,013)	(45,514)
Net book value at 31 March		1,110,886	998,074

The above includes land and property assets with a net book value of £58.0m (2019/20: £81.0m), managed under the Direct Commissioning programme where the Agency acts as a developer. Under this arrangement, external contractors manage build and sales on behalf of the Agency.

The net book value at 31 March includes land and property assets expected to be realised in more than one year of £807.3m (2019/20: £872.3m).

Impairment of land and property assets

Impairments in 2020/21 include charges of £88m (2019/20: £66m) and reversals of £21m (2019/20: £20m).

Following the determination of net realisable value at the reporting period, each asset is individually assessed in order to calculate an impairment/reversal of impairment. The valuation applied reflects the specific intentions Homes England has for the site and its particular disposal strategy. As the portfolio includes many assets which may be deemed unviable without the intervention of Homes England, it is not unusual for assets to be impaired. Some assets may require significant investment which may not readily translate to increased value, at least in the short-term. Valuations for development land are highly sensitive to changes in input assumptions, some of which are subjective in nature, small changes can therefore lead to impairments or reversals. Impairments may be temporary in nature and values may increase in following years, resulting in Impairment reversals.

Valuation

Land and property assets had a combined net realisable value of £1,419m (2019/20 £1,333m).

As described in Note 1m the estimated valuation at the reporting period of the portfolio of land and property assets is obtained in accordance with the current edition of RICS Valuation – Professional Standards published by the Royal Institution of Chartered Surveyors. The information provided to the valuers, and the assumptions and valuation models used by the valuers are reviewed internally in accordance with the Agency’s ALVVE (Annual Land Validation and Valuation Exercise) guidance.

The valuation models used by the external valuers will vary depending on the Agency’s objectives and conditions for each asset. However, they will typically include a mixture of the following:

• Residual method – the residual method is based on the concept that the value of land or property with development potential is derived from the value of the land or property after development minus the cost of undertaking that development, including a profit for the developer.
• Market approach – the market approach uses comparable evidence of similar assets, normally in a similar type of location or geographical area.
• Where disposal processes are well advanced e.g. bids received, preferred bidder identified or conditional agreements entered into, the valuer would be expected to have regard to these. The valuer will make a judgement as to the appropriate weight to apply on a case by case basis depending on how advanced the process is and the considered likelihood of the transaction completing as currently structured.

In all cases further allowances for risk will be applied as appropriate, for example planning risk.

The net realisable value of each asset includes a deduction for expected disposal costs, such as estimated marketing and legal costs. The net book value is the lower of cost and net realisable value.

Sensitivity of the valuation of land and property assets

As described in Note 1m and Note 2, the land and property asset portfolio is not homogeneous in nature as the valuation methodology reflects the Agency’s objectives and conditions for each individual asset. Therefore, the underlying inputs used within the calculation for the net realisable value of each asset will vary depending on the nature of the asset, the Agency’s objectives in respect of the asset and the conditions of the asset. This category is therefore sensitive to a range of underlying inputs which are not necessarily common across the land and property assets portfolio. A sensitivity analysis has been performed in Note 16a to provide an indication of the potential effect of a range of variations in land and property prices on the financial statements.

COVID-19

In 2019/20, firms supporting the year end valuation were directed by the Royal Institution of Chartered Surveyors (RICS) to attach a ‘material valuation uncertainty’ comment in light of the COVID-19 pandemic and the difficulties they had encountered in forming a judgement about valuations Consequently, firms had advised that less certainty and a higher degree of caution should be attached to valuations at 31 March 2020 than would normally be the case. This direction was removed during September 2020 and this remains the case at 31 March 2021. Note 16 provides an analysis of the sensitivity of the land portfolio to changes in land and property prices. In addition, an assessment has been undertaken in relation to the potential impact of COVID-19 on key judgements and assumptions. This is presented in Note 2.

19 Trade and other payables – Group and Agency[***]

	Group 2020/21 £’000	Group 2019/20 £’000	Agency 2020/21 £’000	Agency 2019/20 £’000
Trade payables	532,592	392,801	532,592	392,801
Direct Commissioning	154,291	100,095	154,291	100,095
Deferred income	12,908	9,039	12,908	9,039
Taxes and social security	4,649	13,420	4,649	13,420
Due to subsidiary	–	–	30,290	7,729
Other	23,551	26,640	23,551	26,640
Balance at 31 March	727,991	541,995	758,281	549,724
Of which:
Current liabilities	632,273	426,167	662,563	433,896
Non-current liabilities	95,718	115,828	95,718	115,828
Balance at 31 March	727,991	541,995	758,281	549,724

20 Provisions – Group and Agency[***]

	2020/21 £’000	2019/20 £’000
Balance at 1 April	12,689	12,796
Charge to net expenditure	7,972	47
Unused provisions credited to net expenditure	(37)	(96)
Unwinding of discount/change in discount rate	192	2
Expenditure against provisions	(174)	(60)
Balance at 31 March	20,642	12,689
Of which:
Current liabilities	1,372	234
Non-current liabilities	19,270	12,455
Balance at 31 March	20,642	12,689
Total recognised in Net Expenditure
Increase/(decrease) in provisions recognised in Net Expenditure	8,127	(47)

Provisions include £13.6m environmental liabilities (2019/20: £12.2m) and £6.7m other liabilities (2019/20: £0.5m). Of the net £192k recognised in respect of unwinding of discount/change in the discount rate, £0.1m is due to a change in the discount rate for provisions prescribed by HM Treasury from 0.51% in 2019/20 to 0.02% in 2020/21 with the balance due to the expected timing of the underlying cost moving back by one year.

21 Deferred tax – Group and Agency[***]

The movements in deferred tax for each type of temporary difference are as follows:

2020/21	At 31 March 2020 £’000	Charged to net expenditure £’000	Charged to OCE [*] £’000	At 31 March 2021 £’000
Unused tax losses	(64,728)	(4,915)	–	(69,643)
Arising from IFRS 9 transition [**]	52,103	(1,149)	–	50,954
Provisions	(2,158)	(1,765)	–	(3,923)
Pensions	14,783	2,897	4,932	22,612
Deferred tax liability / (asset)	–	(4,932)	4,932	–

[*] Other Comprehensive Expenditure

[**] Amounts deferred on 1 April 2018 at the point of transition from IAS 39 to IFRS 9 are unwound over a period of 10 years.

All deferred tax is stated on a net basis as the Agency has a legally enforceable right to set off the recognised amounts.

In addition to the above, the Agency has tax losses to carry forward of £184m (2019/20: £175m) for which no deferred tax asset has been recognised because of the uncertainty over future trading profits, which would enable such losses to be utilised. The primary driver of the increase is the residual element to be unwound in relation to the first adoption of IFRS 9.

2019/20	At 31 March 2019 £’000	Charged to net expenditure £’000	Charged to OCE [*] £’000	At 31 March 2020 £’000
Unused tax losses	(72,592)	7,864		(64,728)
Arising from IFRS 9 transition [**]	58,616	(6,513)		52,103
Provisions	(2,176)	18		(2,158)
Pensions	16,152	(526)	(843)	14,783
Deferred tax liability / (asset)	–	843	(843)	–

[*] Other Comprehensive Expenditure

[**] Amounts deferred on 1 April 2018 at the point of transition from IAS 39 to IFRS 9 are unwound over a period of 10 years.

22 Pension arrangements and liabilities – Group and Agency[***]

During the year the Agency’s employees were able to participate in one of the following contributory pension schemes:

• The Homes and Communities Agency Pension Scheme.
• The City of Westminster Pension Fund.
• The West Sussex County Council Pension Fund.

All three schemes are multi-employer defined benefit schemes as described in paragraph 7 of IAS 19 Employee Benefits. The Homes and Communities Agency Pension Scheme is the only scheme open to new employees. The scheme is a final salary scheme but from 1 September 2019, new members will accrue benefits on a career average basis. The other schemes are Local Government schemes which changed from a final salary to career average basis for benefits accruing from 1 April 2014. Further information on the funding arrangements for the schemes is contained within Note (k) below.

Valuations of the Agency’s assets and liabilities in each scheme as at 31 March 2021 have been prepared in accordance with IAS 19 and the results are disclosed in Note (a) below. Note (b) below shows the weighted average of the key assumptions used by each of the scheme actuaries in preparing the valuations, weighted according to each scheme’s liabilities. Other information below is shown on a consolidated basis for all three schemes.

a) Pension assets/(liabilities)

Funded schemes with net assets as shown above are disclosed within non-current assets in the Statement of Financial Position. Unfunded schemes with net liabilities as shown above are disclosed within noncurrent liabilities in the Statement of Financial Position.

As principal employer of the HCA Pension Scheme, the Agency continues to monitor the scheme and has a good working relationship with the Trustees. The Trustees review the Scheme’s investment portfolio on a regular basis. At present, 20% (2019/20: 25%) of the Scheme’s investments are held within liability driven investments which aim to better match the Scheme’s liabilities and partially hedge the Scheme against rises in inflation and interest rates. A further 25% (2019/20: 20%) of assets are held in Corporate Bonds. The liability hedging is managed through Insight Investment (one of the HCA Pension Scheme’s investment managers) Enhanced Selection Funds which allow Insight Investment the discretion to select the most attractively priced hedging instruments to hold in the pooled fund which may include gilts, index linked gilts, gilt repossession or swaps. As at 31 March 2021, the Scheme had an interest rate hedge ratio of 49% (2019/20: 50%) and an inflation hedge ratio of 51% (2019/20: 40%) relative to the gilts-flat liabilities.

b) Actuarial assumptions

The weighted average of the key assumptions used by the actuaries of the pension schemes are as follows:

i) Financial assumptions

ii) Mortality assumptions

Based on actuarial mortality tables, the average future life expectancies at age 65 are summarised below:

c) Fair value of employer assets

Some of the funds in which the Agency’s pension assets are invested permit the use of derivatives for the purposes of achieving their investment aims. In all cases, funds are managed by professional investment managers.

d) Charge to Net Expenditure

e) Amounts recognised in Income and Expenditure Reserve

The cumulative amount of actuarial gains recognised in other comprehensive expenditure since the adoption of IAS 19 is £162.6m (2019/20: £136.6m).

f) Reconciliation of fair value of employer assets

g) Reconciliation of defined benefit obligation

h) Five-year history

i) Sensitivity Analysis

The primary assumptions used in calculating the defined benefit obligation are: discount rate, salary increases, inflation and pension increases and mortality expectations. The assumptions used are specified in Note 22(b). The assumptions are determined by independent professional actuaries whose work is compliant with Technical Accounting Standard 100: Principles for Technical Actuarial Work as issued by the Financial Reporting Council.

IAS 19 sets out the principal underlying the setting of assumptions, that they should be based on the best estimate of future experience, and also gives a clear direction on the basis for calculating the discount rate. Assumptions should also reflect market conditions at the reporting date, including demographic assumptions and the mix of membership of Homes England’s Schemes.

The key assumptions are considered to be the discount rate and the rate of future inflation. The discount rate is important in determining the value of liabilities and is based on high quality corporate bonds at the year end. The rate is in line with the AA corporate bond yield curve at the year end. Inflation expectations inform the rate at which current and future pensioner’s benefits accrue. It is based on CPI at the year end with an inbuilt allowance for an insurance risk premium. Demographic assumptions, including mortality expectations can also have a bearing on the valuation of liabilities, as can the specific membership mix of our schemes.

To assess the defined benefit obligation, assumptions are used in a forward looking financial and demographic model to present a single scenario, using financial assumptions that comply with IAS19. The valuation of the obligation at 31 March 2021 is a snapshot in time; actual experience over time may differ and the total cost of a scheme will depend on a number of factors including the amount of benefits paid, the number of people who benefits are paid to, scheme expenses and the amount earned on assets. These factors aren’t known for certain at the valuation date.

The calculation of liabilities is sensitive to movements in assumptions and even small changes to individual assumptions can have significant impacts. If they were to change, the impact would be as follows:

j) Maturity profile of the defined benefit obligation

The weighted average duration of the defined benefit obligation of the pension schemes is 18 years.

Pension benefits, including insurance premiums, are expected to be paid over time as follows:

k) Funding arrangements

Contribution rates for each of the three schemes are reviewed at least every three years following a full actuarial valuation. The funding strategy in each case is set to target a fully funded position, except for those liabilities which are intentionally unfunded within each of the schemes. Any underfunding is restored to a fully funded position via additional contributions over an appropriate period of time.

The HCA scheme is a multi-employer scheme that does not operate on a segregated basis. Therefore the assets and liabilities are not separately identified for individual participating employers. Benefit obligations are estimated using the Projected Unit Credit Method.

Both Homes England and the Regulator of Social Housing (RSH) are members of the HCA Pension Scheme although Homes England is the only significant contributing employer and accounts for the vast majority of the HCA scheme’s liabilities. Based on actuarial data at 31 March 2021, the share of the HCA scheme’s assets and liabilities attributed to RSH is approximately 4% with the remainder attributed to Homes England. All assets are pooled and a single employer contribution rate is determined as part of the actuarial valuation for the whole scheme. This contribution rate applies for the principal employer, Homes England, along with any other participating employers, including RSH.

Homes England and RSH record the cost of employer contributions in their own Financial Statements and account for their proportionate share of the Scheme’s asset and liabilities separately. The assets and liabilities disclosed in Homes England’s Financial Statements relates only to its share of the Scheme’s assets and liabilities and not to the assets and liabilities of the entire Scheme.

There are no formal arrangements in place for the allocation of a deficit or surplus on the wind-up of the HCA Pension Scheme or the Agency’s withdrawal from the scheme. Under both scenarios, exit debts would become payable under Section 75 of the Pensions Act 1995.

The Westminster and West Sussex schemes are members of the Local Government Pension Scheme (LGPS). Assets and liabilities for all employers in LGPS funds are identifiable on an individual employer basis. There are no minimum funding requirements or winding up provisions in the LGPS. Any deficit on withdrawal is required to be paid by the withdrawing employer and any surplus is retained by the fund.

l) McCloud judgement

In December 2018, the Court of Appeal ruled against the Government in two cases: Sargeant and others v London Fire and Emergency Planning Authority [2018] UKEAT/0116/17/LA and McCloud and others v Ministry of Justice [2018] UKEAT/0071/17/ LA. The cases related to the Firefighters’ Pension Scheme (Sargeant) and to the Judicial Pensions Scheme (McCloud). For the purposes of the LGPS, these cases are known together as ‘McCloud’. The court held that transitional protections, afforded to older members when the reformed schemes were introduced in 2015, constituted unlawful age discrimination.

On 27 June 2019 the Supreme Court denied the Government’s request for an appeal, and on 15 July 2019 the Government released a statement to confirm that it expects to have to amend all public service schemes, including the LGPS. The estimated impact on the total liabilities at 31 March 2021 has therefore been allowed for as a past service cost and has resulted in an increase of c£0.5m in the defined benefit obligation as at 31 March 2021. It should be noted that this allowance is an estimate of the potential impact on the Employer’s defined benefit obligation based on analysis carried out by the Government Actuary’s Department (GAD) and the Employer’s liability profile. It is not yet clear how this judgement may affect LGPS members’ past or future service benefits.

23 Contingent assets and liabilities[***]

Contingent assets

The Agency has in certain instances disposed of land or made grant payments with certain conditions attached, which if no longer fulfilled will result in a payment to the Agency. Examples include where there is a subsequent change in use of land sold which materially increases the return to the purchaser, or if the conditions of a grant payment are no longer met. The normal term during which this arrangement remains in force is 21 years. For affordable housing and other community related schemes the term is more usually 35 years. By its nature this income is variable and the timing of receipt is uncertain, therefore it is not possible to quantify the likely income which may ultimately be received by the Agency.

Contingent liabilities

a) Sunderland City Council

The freeholds of several hundred properties on two estates in Washington were transferred to Sunderland City Council on 1 April 1997. The transfer was subject to an Agency indemnity valid for a period of 30 years against costs which may be incurred in remedying shale related defects. This indemnity was issued with the approval of MHCLG. The extent of the potential liability will only be known once any defects are identified. No claims have yet been notified under this indemnity.

b) The West Sussex County Council Pension Fund

At 31 March 2021, the Agency had 11 employees (31 March 2020: 11 employees) who were active members of the West Sussex County Council Pension Fund. When the Agency’s last active member leaves the scheme, the obligation to pay an exit debt will be crystallised. The timing and value of any exit debt due in the future is not yet known.

c) Other contingent liabilities

The Agency is potentially liable for miscellaneous claims by developers, contractors and individuals in respect of costs and claims not allowed for in development agreements, construction contracts, grants and claims such as Compulsory Purchase Orders. Payment, if any, against these claims may depend on lengthy and complex litigation and potential final settlements cannot be determined with any certainty at this time. As claims reach a more advanced stage they are considered in detail and specific provisions are made in respect of those liabilities to the extent that payment is considered probable.

24 Financial commitments[***]

	2020/21 £m	2019/20 £m
Not later than one year	3,445	4,161
Later than one year and not later than five years	3,299	2,764
Later than five years	105	127
Total commitments at 31 March	6,849	7,052

The Agency has made financial commitments in relation to programmes for investments in loan and equity assets, which had become unconditional at the reporting date, but which had yet to be drawn down by that date. The value of these commitments, excluding those disclosed in Note 13c, was £4,657m at 31 March 2021 (31 March 2020: £3,724m). The increase includes £3,250m additional Housing Infrastructure Fund contracted and approved in the year.

The Agency has entered into financial commitments in relation to affordable housing grant programmes totalling £751m at 31 March 2021 (31 March 2020: £1,783m). The increase is due to additional commitments through the Strategic Partnership framework.

The Agency has also given outline approval to investments under the Help to Buy scheme which, while still conditional, are likely to result in the drawdown of investments in the coming year. The value of these outstanding approvals at 31 March 2021 was £1,083m (31 March 2020: £1,153m).

In addition to the above, the Agency has entered into financial commitments in relation to land development and building leases totalling £333m and £25m respectively at 31 March 2021 (31 March 2020: £382m and £10m).

The Agency is a non departmental public body sponsored by MHCLG. Therefore any other bodies sponsored by MHCLG are considered to be related parties. During the year, the Agency has had a significant number of material transactions with MHCLG.

The Agency has had a number of material transactions with other Government departments and other Government bodies, including various Local Authorities, the Department for Business, Energy & Industrial Strategy (previously the Department for Business, Innovation and Skills), the Department of Health and Social Care and the Ministry of Justice.

The Agency has also had a number of material transactions with its associated undertakings, joint ventures and other related parties as follows:

2020/21	Capital invested in/ (redeemed from) entity £m	Grants and other payments £m	Loans / equity advanced / (repaid) £m	(Loan interest)/ (dividends received) £m
Payments out
English Cities Fund Limited Partnership	4.1	–	–	–
Sigma PRS Property Investments	–	–	16.6	–
Hyde Housing Association	–	12.3	–	–
Receipts in
English Cities Fund Limited Partnership	(27.7)	–	–	–
Kier Community Living	–	–	(10.6)	–

2019/20 (Represented [*])	Capital invested in/ (redeemed from) entity £m	Grants and other payments £m	Loans / equity advanced / (repaid) £m	(Loan interest)/ (dividends received) £m
Payments out
English Cities Fund Limited Partnership	22.3	–	–	–
Sigma PRS Property Investments	–	–	62.0	–
Hyde Housing Association	–	41.5	–	–
Eastleigh Borough Council	–	1.4	–	–
Receipts in
Countryside Maritime Limited	–	–	–	(1.8)
English Cities Fund Limited Partnership	–	–	–	(1.0)
Kier Community Living	–	–	(3.0)	–
Sigma PRS Property Investments	–	–	(30.7)	–

[*] The represented balance for prior year relates to the inclusion of Hyde Housing Association (HHA). The Agency and HHA became related parties in February 2020.

In addition to the above, the Agency holds £21.7m (2019/20 £7.7m) on behalf of English Partnerships (LP) Ltd, the Agency’s wholly owned subsidiary.

The related party relationship with Hyde Housing Association is due to a close relationship between a member of the senior leadership team at the Agency and a member of the senior leadership team at HHA. The transactions in the year relate to grant funding provided by the Agency.

The related party relationship with Sigma PRS Property Investments is due to one member of the Agency’s Board also being a Director of Sigma Capital Group PLC, who are the parent company of Sigma PRS Property Investments. The transactions relate to loan funding provided by the Agency under the Short Term Fund which offers the applicant a revolving facility. The total agreed loan facility that can be drawn at any one time is £44.6m. As at 31 March 2021 the balance of the loan was £43.5m.

The Agency’s internal approval procedures are established so that members of staff nominated to act as Directors or Officers of associated undertakings and joint ventures do not have delegated authority with regard to the relevant undertaking.

There were no other material transactions in which related parties had a direct or indirect financial interest other than those disclosed above.

None of the senior managers or related parties has undertaken any material transactions with the Agency during the year.

For details of compensation paid to management please see the Remuneration Report.

26 Events after the reporting period[***]

The Agency’s Financial Statements are laid before the Houses of Parliament by the Secretary of State for Housing, Communities and Local Government. IAS 10 Events After the Reporting Period requires the Agency to disclose the date on which the accounts are authorised for issue.

The certified accounts were authorised for issue by the Chair and the Chief Executive and Accounting Officer on the same date as the Certificate and Report of the Comptroller and Auditor General.

COVID-19

As detailed in Note 2, the COVID-19 pandemic had a significant impact on the financial year 2020/21. There still remains some uncertainty over the future effects of the pandemic. Scenario analysis to highlight the potential impact of possible alternative scenarios on the Agency’s assets has been carried out and disclosed in Note 2.

0300 1234 500

enquiries@homesengland.gov.uk

Bristol

2 Rivergate

Temple Quay

Bristol

BS1 6EH

Coventry

One Friargate

Coventry

CV1 2GN

Crawley

Town Hall

The Boulevard

Crawley

RH10 1UZ

Leeds

1st Floor Lateral

8 City Walk

Leeds

LS11 9AT

Liverpool

11th Floor

No.1 Mann Island

Liverpool

L3 1BP

London

50 Victoria Street

Westminster

London

SW1H 0TL

Manchester

1st Floor Churchgate House

56 Oxford Street

Manchester

M1 6EU

Newcastle

Lumen Building

St James’ Boulevard

Newcastle Helix

Newcastle- upon- Tyne

NE4 5BZ

Northstowe

Northstowe House

Rampton Road

Longstanton

CB24 3EN