States of Jersey Financial Report and Accounts 2013.

FINANCIAL REPORT AND ACCOUNTS 2013

R.65/2014

FINANCIAL REPORT

AND ACCOUNTS

2013

1

2

Contents

1  The Minister's Report  5 2  The Treasurer's Report  11

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2. General Revenue Income . . . . . . . . . . . . . . . . . . . . 15
3. Ministerial and Non-Ministerial Departments' RevenueExpenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4. States Trading Operations – Net Revenue

Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . .30

5. Other Income and Expenditure and Accounting Adjustments   . . . . . . . . . . . . . . . . . . . . . . . . . .31
6. Capital Expenditure . . . . . . . . . . . . . . . . . . . . . . .36
7. The States Balance Sheet   . . . . . . . . . . . . . . . . . . .42
8. Explanation of the Structure of the States

of Jersey   . . . . . . . . . . . . . . . . . . . . . . . . . . . .55

9. Sustainability   . . . . . . . . . . . . . . . . . . . . . . . . .57
10. Corporate Social Responsibility . . . . . . . . . . . . . . . .60
11. Conclusions   . . . . . . . . . . . . . . . . . . . . . . . . . .61

3  Statement of Responsibilities for

the Financial Report and Accounts  63 4  Remuneration Report  65

1. Remuneration Policy . . . . . . . . . . . . . . . . . . . . . .67
2. Council of Ministers  . . . . . . . . . . . . . . . . . . . . . .67
3. Accounting Officers  . . . . . . . . . . . . . . . . . . . . . .68
4. Segmental Analysis of Staff  . . . . . . . . . . . . . . . . . .72
5. Median Remuneration  . . . . . . . . . . . . . . . . . . . . . 74

5  Governance Statement  75

1. Scope of Responsibility  . . . . . . . . . . . . . . . . . . . .77
2. The Purpose of the Governance Framework   . . . . . . . . .77
3. Governance Framework and Structures . . . . . . . . . . . .78
4. Review of Effectiveness  . . . . . . . . . . . . . . . . . . . .90
5. Significant Governance issues   . . . . . . . . . . . . . . . .93
6. Closing Statement . . . . . . . . . . . . . . . . . . . . . . .99
7. Appendix A – States of Jersey Framework

of Corporate Governance   . . . . . . . . . . . . . . . . . . 100

6  Introduction to the Accounts 103

1. Changes in Accounting Standards . . . . . . . . . . . . . . 105
2. Explanation of the contents of the Accounts   . . . . . . . . 106

7  Auditor's Report  107

1. Independent Auditors' Report to the Minister for Treasury and Resources of the States of Jersey   . . . . . . 109
2. Report of the Comptroller and Auditor

General to the States Assembly  . . . . . . . . . . . . . . . 110

8  Primary Statements  111

1. States of Jersey Consolidated Statement of Comprehensive Net Expenditure (Operating Cost Statement) for theyear ended 31 December 2013  . . . . . . . . . . . . . . . . . . 113
2. States of Jersey Consolidated Statement of Financial Position (Balance Sheet) as at 31 December 2013  . . . . . 114
3. States of Jersey Consolidated Statement of ChangesinTaxpayers' Equity for the year ended 31 December 2013 . . 115
4. States of Jersey Consolidated Statement of Cash Flows

for the year ended 31 December 2013 . . . . . . . . . . . . 116

9  Notes to the Accounts  117

1. Significant Accounting Policies  . . . . . . . . . . . . . . . 119
2. Critical Accounting Judgements and key

sources of estimation uncertainty . . . . . . . . . . . . . . 133

3. Changes to Accounting Standards   . . . . . . . . . . . . . 135 9.3a  Restated consolidated Statement of Financial

Position as at 31 December 2012  . . . . . . . . . . . . . . 136 9.3b  Restated consolidated Statement of Financial

Position as at 1 January 2012  . . . . . . . . . . . . . . . . 137 9.3c  Restated Consolidated Statement of Comprehensive Net Expenditure for the year ended 31 December 2012 . . . . . 138

4. Segmental Analysis   . . . . . . . . . . . . . . . . . . . . . 139 9.4a  Segmental Analysis – Statement of Comprehensive

Net Expenditure for the year ended 31 December 2013 . . . 140 9.4b  Segmental Analysis – Statement of Financial

Position as at 31 December 2013  . . . . . . . . . . . . . . 141 9.4c  Segmental Analysis – Statement of Comprehensive

Net Expenditure for the year ended 31 December 2012 . . . 142

9.4d  Segmental Analysis – Statement of Financial

Position as at 31 December 2012  . . . . . . . . . . . . . . 143

5. Revenue   . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
6. Expenditure   . . . . . . . . . . . . . . . . . . . . . . . . . 145
7. Non-Cash Items and other Significant Items

included in Net Revenue Expenditure   . . . . . . . . . . . . 146

8. Investment Income . . . . . . . . . . . . . . . . . . . . . . 147
9. Gains and Losses on Financial Assets . . . . . . . . . . . . 148
10. Social Benefit Payments . . . . . . . . . . . . . . . . . . . 149
11. Staff Costs  . . . . . . . . . . . . . . . . . . . . . . . . . . 150
12. Grants   . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
13. Finance Costs   . . . . . . . . . . . . . . . . . . . . . . . . 157
14. Property, Plant and Equipment   . . . . . . . . . . . . . . . 158
15. Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . 162
16. Non-Current Assets Held for Sale  . . . . . . . . . . . . . . 163
17. Loans and Advances . . . . . . . . . . . . . . . . . . . . . 164
18. Available For Sale Financial Assets   . . . . . . . . . . . . . 165
19. Infrastructure Investments   . . . . . . . . . . . . . . . . . 167
20. Investments held at Fair Value through

Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . 168

21. Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 169
22. Trade and Other Receivables   . . . . . . . . . . . . . . . . 170
23. Cash and Cash Equivalents   . . . . . . . . . . . . . . . . . 172
24. Trade and Other Payables  . . . . . . . . . . . . . . . . . . 173
25. Currency in Circulation . . . . . . . . . . . . . . . . . . . . 174
26. Finance Lease Obligations . . . . . . . . . . . . . . . . . . 175
27. Provisions   . . . . . . . . . . . . . . . . . . . . . . . . . . 176
28. Derivative Financial Instruments   . . . . . . . . . . . . . . 177
29. Past Service Liabilities . . . . . . . . . . . . . . . . . . . . 179
30. Defined Benefit Pension Schemes Recognised

on the Statement of Financial Position   . . . . . . . . . . . 181

31. Capital Commitments   . . . . . . . . . . . . . . . . . . . . 183
32. Commitments under Operating Leases  . . . . . . . . . . . 184
33. Risk Profile and Financial Instruments   . . . . . . . . . . . 186
34. SOJ Common Investment Fund  . . . . . . . . . . . . . . . 194
35. Contingent Assets and Liabilities  . . . . . . . . . . . . . . 199
36. Losses and Special Payments . . . . . . . . . . . . . . . . 201
37. Gifts   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
38. Related Party Transactions   . . . . . . . . . . . . . . . . . 203
39. Third Party Assets . . . . . . . . . . . . . . . . . . . . . . 207
40. Entities within the Group Boundary  . . . . . . . . . . . . . 208
41. Social Security Funds Primary Statements  . . . . . . . . . 210
42. Discontinuing Operations  . . . . . . . . . . . . . . . . . . 214
43. Events after the Reporting Date  . . . . . . . . . . . . . . . 221

44. Publication and Distribution of the Financial

Report and Accounts . . . . . . . . . . . . . . . . . . . . . 222

1  The Minister's Report

The Minister's Report

1.1  The Minister's Report

This has been a busy year for the States, a year in which the Council of Ministers have been developing and progressing solutions to major issues facing the Island. The development of solutions for investment in the Future Hospital, new social and affordable housing and the liquid waste strategy demonstrate our preparedness to tackle the difficult issues which will make a positive difference to Islanders over the long term. In so doing we have been balancing competing priorities, managing a growing demand for services whilst at the same time responding to these demands with innovative funding solutions and within constrained resources.

During the year the Treasury has been supporting the delivery of the Council of Ministers' service priorities

of creating jobs, improving health and providing more and better housing for Islanders. In line with the recommendations of the Fiscal Policy Panel, funding mechanisms for three major projects that are essential for the Island's long term infrastructure needs have been agreed.

Future Hospital

This project is a vital part of the reform of Health and Social Services. A new hospital will be delivered, fully funded, with no debt and no tax increases. Investment returns from the Strategic Reserve in the coming years will be used to fund the estimated cost of £297 million. The Strategic Reserve investment returns for 2013 were £91.9 million.

Social and affordable housing

New housing and improvements to the existing stock to meet decent home standards will be achieved by using the States of Jersey's strong balance sheet to borrow funds for the longer term at low rates of interest.

The debt will be repaid from the rental stream. Good progress has been made into the mechanisms by which this funding will be secured, including a strong credit rating and work on the issue of a public bond.

Liquid Waste

A new liquid waste infrastructure will be funded without any new cost to the taxpayer. A combination of existing capital budgets, the main capital programme and investment from the Currency Fund in infrastructure will be used to fund these improvements in Jersey's infrastructure.

In November, the States of Jersey was awarded one of the best international credit ratings possible by Standard and Poor's (S&P). S&P assigned a long term issuer default rating' of AA+, with a stable outlook. In addition, Jersey was assigned the highest S&P short term rating of A-1+. These ratings are recognition of Jersey's prudent fiscal policies that have resulted in balanced budgets over many years as well as the accumulation of assets that can be drawn down to support growth during periods

of weakness (such as the last five years). The stable outlook' reflects S&P's view of Jersey's high wealth and government finances.

Protecting and retaining jobs in Jersey has been a particular focus for us this year. We have taken steps to stimulate the local economy by bringing forward ambitious capital schemes. These include using an infrastructure investment to fund a scheme to build first-time buyer homes in Trinity , the renovation of St James' Church and proposals for a new Police Station at Green Street. We have also introduced the Pilot Starter Home Deposit Loan Scheme to help first time buyers purchase housing, further supporting the local economy and the construction industry, as well as helping first time buyers onto the property ladder.

Whilst I recognise the legitimate debate concerning the increase in public spending, it remains key that resources are targeted to help meet the States' Strategic Objectives. The Medium Term Financial Plan (MTFP) identified vital areas of growth in 2013, including investment to help get people into work of £8.2 million, and commitments to the reform of Health and Social Services of £11.8 million.

We also increased allocations to Income Support and Supplementation by £11.6 million, to help protect the most vulnerable in our community. These increases were funded in part through further savings of £22.7 million delivered by departments during the year, and the

States remains committed to reforming the public sector to ensure that the services expected by Islanders are delivered effectively and efficiently. The 2014 Budget Statement sought to modernise our tax system, and make it fairer for everyone. The Treasury and departments have also invested time in developing a Long Term Capital Plan and a Long Term Revenue Plan, which will help underpin Jersey's future financial planning and ensure that

the high quality services the public expect are appropriately funded.

The Minister's Report

During the year the Chief Minister has undertaken a series of visits including to China and Abu Dhabi, to ensure that Jersey is represented in fast-growing markets, and to strengthen business and diplomatic relations. I have also visited Washington DC and Doha, visits which promoted new business for the Island and helped build productive relationships. These visits are vital to the Island's continuing success.

Managing the Budget: States Income

Despite a challenging economic climate, General Revenue Income was £9.0 million higher than the preceding year. Our healthy income tax receipts show that our zero/

ten approach, confirmed as acceptable to the EU Code Group in 2011, combined with the introduction of GST, was the right one. Whilst general revenue income is still not back to 2008 levels we have managed the transition and are returning to balanced budgets. The tax collection rate achieved by the Taxes Office is also enviable,

being at an all-time high and exceeding that achieved by the UK government.

Managing the Budget: Expenditure

2013 saw the first year of the Medium Term Financial Plan, promoting longer term financial planning and giving Departments more certainty within which to plan and reorganise service delivery. I am especially pleased that the assumptions within the first Medium Term Financial Plan have held up during 2013.

Departments spent a net amount of just under

£636.2 million in 2013 on providing services. This was almost £22.8 million less than the amount available to them once unspent funds from 2012 had been added

to their budgets as approved in the 2013 Medium Term Financial Plan. Most of the underspend will be carried forward to 2014, including nearly £19.9 million within Departments. A flexible system means that Departments do not need to "use it or lose it" by the end of December each year, and can plan with more certainty. This allows the funding carried forward to be applied effectively to meet the service priorities set out in the Strategic Plan.

On top of this over £20.7 million of contingency and restructuring expenditure remained at the end of the

year and £18.3 million will be carried forward into 2014. I have said previously that I would not expect contingency funding to be spent each year that it is available, but that

it should be carefully managed. It is pleasing that so much funding remains at the end of 2013 and it is sensible that we retain the balance as a buffer against unforeseen circumstances without needing to go back to the States for additional funding.

At the same time as spending less than their available budgets, Departments have achieved over £22.7 million of savings in 2013, the third year of the three-year Comprehensive Spending Review programme targeted to achieve £65 million savings. Whilst the time frame to achieve the savings has now been extended to 2016, and there is currently a projected £3.6 million shortfall due to the States' decision not to agree a reduction in subsidies to fee paying schools. This is a tremendous achievement and I would like to thank all Departments for their efforts. A £22.7 million reduction, which permanently comes out of budgets, is the equivalent of, for example, a 1.5% rise in GST.

Capital expenditure is essential in order to maintain and improve our fixed asset base. It is also one of the key tools at our disposal to support and stimulate the economy at this time. In 2013 Departments spent £43.2 million on capital projects. Significant projects during the year included: Philips Street Shaft, which will help reduce the risk of flooding in St Helier, improvements to the Prison and a refurbishment of the clinical assessment centre and mental health residential unit at Clinique Pinel, as well as work on the Island's infrastructure and Social Housing stock.

Managing the Balance Sheet

2013 has seen a continued focus on managing the States' balance sheet. This is an area that has, perhaps, been overshadowed in the past by the emphasis on controlling expenditure and raising enough income to pay for it. Active management of our assets and liabilities provides another means of safeguarding us against future economic shocks and providing sources of significant levels of funding.

Financial Report and Accounts 2013

The States balance sheet remains strong, with fixed  Conclusions

assets now worth nearly £3.3 billion. This does not, of

course, mean that our assets can simply be sold off to  I am fortunate, as Minister for Treasury and Resources, provide additional funding. They are needed to provide  to have the benefit of inheriting wise and far sighted essential services to Islanders. We can, however, look  decisions by my predecessors as well as to have an

at managing those assets better. This approach has the  innovative and bold Treasurer and staff, who are delivering potential to release assets for disposal or alternative  real change without ever losing sight of the prudence

use. For example relocation of the Police Headquarters  needed when dealing with taxpayers' money. Together

to Green Street will free the Summerland site for Social  they have provided me with the tools I need to make Housing, and Jersey Property Holdings have rationalised  decisions, some of which are difficult, some of which are and modernised office accommodation by relocating its  unpopular, but which are 100% necessary if Jersey's

staff from three different sites into one at Maritime House.  economy is to survive and prosper. I have described

how Jersey States' finances are in good shape despite a The value of the States' Strategic Investments increased  number of challenges. This has been achieved through

by £25.0 million in 2013. The Treasury operates a policy  sometimes tough decisions and by not squandering taxes of active management of these investments, with regular  when times are better. It is this prudent approach which meetings throughout the year. Together, the four utilities  has resulted in Jersey being awarded one of the best contributed over £11 million in dividends to the States in  international credit ratings possible.

2013, which obviates the need for that funding to be raised

by taxes. I will continue to work with the Boards of the  We are underspending, and the value of our assets is utilities to deliver the best returns possible to the States to  rising. This does not happen by accident and I am grateful supplement our income, whilst at the same time allowing  to the Treasurer, her staff and my fellow Ministers and their them to retain sufficient working capital to be able to grow  departments. We must not be complacent. If we continue their businesses. to manage our finances carefully we can continue to direct

taxpayers' money to where it is most needed and where The Common Investment Fund (CIF) saw returns  it will benefit most Islanders, particularly those who are in of £260.9 million in 2013, £251.0 million of which is  need of support in challenging times.

attributable to funds within these Accounts. This increase

in value is not income to the States in the same way as  All that remains is for me to thank all the staff in the

taxes or dividends: the increases in value remain within  Treasury and Resources Department and across the

the relevant Funds to be used for specific purposes.  States for their hard work this year. In particular I want The Strategic Reserve stood at £743.1 million at the  to thank Laura Rowley, the Treasurer, for her leadership end of 2013, having seen returns of £91.9 million. The  of the department. I also extend my thanks to David Le States decided in the 2014 Budget Statement to allocate  Cuirot, the Comptroller of Taxes, Mike Robinson, Head investment returns to fund the Future Hospital project.  of Customs and Immigration, and my Assistant Minster,

Eddie Noel, for his help and support.

Pension past service liabilities reduced by £4.8 million

in 2013. This was mostly due to a reduction in the Public  I am proud to present the Financial Report and Employees Contributory Retirement Scheme pre-1987  Accounts for 2013 and look forward to continuing to liability, which has seen increased repayments in the  prepare the ground so that Jersey is ready to take year as part of the Medium Term Financial Plan. The  advantage of recovery.

increased repayments included within the Medium term

Financial Plan will enable the States to repay this liability

by 2053, 30 years earlier than originally planned, and

reduce the cost of repayment by £1.8 billion over the

long term. Notwithstanding that, we must make changes

to the States Pension Schemes to ensure that they are

sustainable for the future and over the last year significant  Senator Philip Ozouf

progress has been made with developing proposals that

will ensure PECRS is sustainable, affordable and fair for  Date: 12 May 2014

the long term.

The Minister's Report

2  The Treasurer's Report

The Treasurer's Report

The Treasurer's Report

1. Introduction

The Financial Statements presented in Sections 8 and

9 of this Financial Report and Accounts are prepared in accordance with the States of Jersey Financial Reporting Manual (JFReM) which applies International Financial Reporting Standards (IFRS) as adapted or interpreted

for the Public Sector in Jersey. The Treasurer's Report supplements these statutory statements, expanding on the results for the year and presenting them in a format more comparable to approvals made by the States Assembly. This includes the out-turn of General Revenue Incomes

in Section 2.2, including Tax and Duties, which form the main source of income for States Departments spending and are approved in the Annual Budget Statement. Results for Near-Cash Revenue Expenditure of States Departments (the amount spent on day-to-day activities of the States) are considered in Section 2.3. The results of Trading Operations and Special Funds are also examined, as is Capital Expenditure and the Financial Position of the States.

1. Summary of Performance

The original Budget for 2013 was to end the year with a net operating surplus of £19.8 million. We have in fact ended the year with a net operating surplus of £0.5 million.

States Net General Revenue Income was £9.3 million less than originally budgeted, at £636.7 million.

Net Income tax was £3.3 million less than budgeted,

due mostly to a £20 million underachievement in Personal Tax, due to changes to distribution rules and the current economic environment, an £18 million overachievement in Business Tax due to increases

in revenues from large finance sector companies and one-off revenue.

Stamp Duty was £7.2 million less than budgeted, due

to a slower than expected economic recovery.

Fines and Other Income were £3.5 million more than

budgeted, due to an additional Jersey Post dividend.

Departmental Near Cash Net Revenue Expenditure (the amount spent on day-to-day activities) was £10.0 million more than the MTFP, but £22.8 million less than the approved amount after carry forwards and other allocations, at £636.2 million.

Education Sport and Culture was £4.0 million less than

budgeted, due to the system of delegated financial management arrangement, which allows schools to manage the difference between the academic and financial year.

Treasury and Resources was £3.6 million less than

budgeted, due to the timing of spend on ongoing projects.

Social Security was £2.8 million less than budgeted,

due to lower claimant numbers than expected.

Departments will be carrying forward nearly £19.9

million of these approvals into 2014 for projects and other spending pressures, and £0.9 million will be transferred to contingency.

In addition £20.7 million of Central Contingency was not needed in 2013. £3.3 million was returned to the Consolidated Fund, as planned in the MTFP, and the remainder will be carried forward into 2014.

After adjusting for Trading Operations, Special Funds and other accounting adjustments there was an accounting surplus of £285.6 million for the year – this in general relates to the amounts that are not available for everyday expenditure.

The Treasurer's Report Introduction 13

Summary of Performance

Depreciation and charges relating to the use of

Property, Plant and Equipment by the States for Ministerial and Non-Ministerial departments were more than budgeted by £10.7 million, increasing due to the higher carrying value of assets as a result of the 2012 Valuation.

Special Funds and the Social Security Funds saw

Net Income of over £320.9 million. This is mostly attributable to returns on investments held by the Strategic Reserve (£91.9 million) and the Social Security (Reserve) Fund (£195.3 million). Neither of these funds is available for current expenditure.

A large amount of Special Funds' income relates

to returns on Investments held in the Common Investment Fund (CIF). The CIF generated significant income for the States of Jersey during 2013, earning net income of £251.0 million in total, representing a return on capital of around 15.9%. Whilst much of this gain was attributable to rallies in the markets in which the CIF invested, the CIF's investment managers also exceeded their combined benchmarks by 1.3% (equivalent to £20.5 million).

The most significant Accounting Adjustment was

associated with Pension liabilities (£4.7 million), due mostly to a reduction in the value of the PECRS pre- 1987 debt due to changes in actuarial assumptions.

The States also spent £43.2 million on Capital projects in the year, including improvements to Social Housing and the Island's Infrastructure. The States Balance Sheet remains strong

The States owns Fixed Assets worth £3.3 billion, including £0.7 billion of Social Housing assets.

Strategic Investments in utility companies increased by

£25.0 million, and are now valued at £313.8 million.

Pensions liabilities relating to past service liabilities

have decreased by £4.8 million to £343.4 million.

2. At a Glance – Financial Results TABLE 1 – SUMMARY OF FINANCIAL RESULTS

2013

Restated  2013

Final  2013 2012  Budget

Approved  Actual Actual / MTFP

Budget

£m £m £m £m

(627.7) States Net General Revenue Income (646.0) (646.0) (636.7) 600.6 Departmental Net Revenue Expenditure – Near Cash 626.2 659.0 636.2

(27.1) Operating (Surplus) / Deficit for the Year (19.8) 13.0 (0.5)

45.0 Depreciation and other Non-Cash Expenditure 41.7 41.7 52.3

21.4 Trading Operations Net Revenue Expenditure / (Income) 0.1 0.7 (1.5) (184.3) Net Revenue Income of Special Funds and SOJDC (323.4) (42.9) Other (Income) / Expenditure and Accounting Adjustments (12.5)

(187.9) Net Accounting (Surplus) / Deficit for the Year 22.0 55.4 (285.6)

The Treasurer's Report

14 Introduction

At a Glance – Financial Results

2. General Revenue Income

NET GENERAL REVENUE INCOME

Actual £636.7m

2013

B2u0d1g3et £646.0m

1.4% less than budget

The largest element of income received by the States is "General Revenue Income", which is made up of income to the Consolidated Fund covered by the Annual Budget Statement and includes taxes, duties, financial returns and investment income.

In the Budget Statement, General Revenue Income

is voted net of directly related expenditure, such as Irrecoverable Debts or Investment Management fees,