Accounting for Academies FAN & CSFAN May cipfa.org.uk

Transcription

1 Accounting for Academies FAN & CSFAN May 2014 cipfa.org.uk

2 Introduction Academy Status Growth of Academies and the challenges Lessons from 2011/12 Accounts

3 Academy Status Academy Trust Status Exempt Charity Charitable co. limited by guarantee Central Govt department Legislation Academies Act 2010 Charities Act 2011 (Charities SORP) Companies Act 2006 HMT managing public money 5

4 What does this mean for financial reporting? Exempt charity and a charitable company Central government department Charities Accounts & some Co. Account reports Annual Accounts Return Co. Account registration & filing Feeds in to EFA accounts EFA feeds into DfE Accounts Whole Government Accounts (WGA) 6

5 GROWTH OF ACADEMIES cipfa.org.uk

6 A changing Landscape: Academies Open January Open Academies NB: In May 2010 there were 210 sponsored academies 8

7 Creative Tension We want guidance! cipfa.org.uk We want accountability! We want freedom!

8 LA Implications Can you support them? Financial implications if you do and if you don t? What areas can you provide support? What else do you need to know?

9 IMPROVEMENTS REQUIRED 2011/12 ACCS 11

10 Auditors Management letters 2011/12 annual accounts - Included 4,000+ control weaknesses. Themes were: Reconciliation of key control accounts Accounting and recording of fixed assets General application of good accounting and management information Improper fund accounting Payroll issues Treasury management and cash controls Purchase ledger weaknesses Responsible officer role Inadequate risk management arrangements 12

11 Regularity Findings Analysis of irregularity in 2011/12 annual accounts : 3 common themes: lack of consent from the Secretary of State for certain types of severance payments to staff; lack of consent from the Secretary of State for leases, most commonly operating leases over three years; lack of consent from the Secretary of State for borrowing. 13

12 Accounting for Academies Final Accounts Disclosure 14

13 What we will cover Fund Accounting (part of the charities SORP) Accounting for income Allowance for doubtful debts Balance sheet accounting Capital Accounting Accounting for transferred assets & liabilities 15

14 Annual Accounts cipfa.org.uk Reports A governors / trustees report Governance Statement Statement of Governors Responsibilities Statement of Regularity, Propriety & Compliance Independent auditors report (provided by external auditor) Statements A Statement of Financial Activities (SOFA) Balance sheet Cash flow statement A summary income and expenditure account & Statement of Total Recognised Gains & Losses (only in certain circumstances) Summary of key accounting policies Notes to the accounts 16

15 SOFA Principles Single accounting statement with the objective of showing all incoming resources and resources expended in the year & how these are in furtherance of its charitable objectives. Analyse all income and expenditure in two ways: Which fund it relates to and Which activity (subjective category) it relates to 17

16 Statement of Financial Activities (SOFA) Column format showing Analysis of Funds Unrestricted general (revenue), restricted general funds, and restricted fixed asset funds. Row format showing I&E Analysis Generation of funds, Charitable Activities and Other (income), Governance (expenditure) Transfers between funds Other recognised gains and losses Gains and losses on revalued fixed assets Gains and losses on investment assets Actuarial Gains or Losses on Defined Benefit Pension Schemes. 18

17 19

18 Fund accounting for Academies Unrestricted Restricted Revenue Designated Revenue Pension *Endowment Fixed Assets Unrestricted - have no restrictions as to their use, and can be expended on any purpose of the academy at the governors discretion Restricted -Those that have a certain condition attached. Restriction could be set by donor, for specific project, post, fund appeal for specified goal (GAG is restricted) *NB if relevant 20

19 Decisions Restricted or Unrestricted? Is the income a contract or a donation? Has the donor set a restriction Is the restriction narrower than the charities objects? Yes No Unrestricted Restricted Unrestricted 21

20 Contracts General Rules A contract is a legally binding agreement In a contract the academy is obliged to fulfil the terms of the contract but is not obliged to spend all of the contract fee on the specified activity. In a contract, if one party does not uphold their side of the contract, then the other party could take legal action In a contract - if a surplus is achieved the academy may retain this. Under a grant arrangement -generally the case the academy may be expected to repay the funder any unspent element. 22

21 Grants and Donations No legal difference between a grant and a donation Given freely by the donor Grant -Likely to be for a specific purpose i.e. restricted May have other conditions including timing and schedule of payments Donations may /may not have a condition attached Donor specification creates a restriction which is an obligation under Trust Law Breach of trust if funds not used as per donor specification trustees can be personally liable 23

22 Service Level Agreement Sets out level of service / performance standard Could be associated with either a grant or a contract Not a legally recognised form in itself. 24

23 Charity SORP rules- A recap Restricted funds have to be used for the purpose for which they were given. This purpose will be narrower than the charity s objects. Donor sets the restriction Governors can designate but not restrict. Grants are a form of donations and funder can specify a restriction / condition Contracts are not donations & therefore cannot be treated as restricted funds. Contracts are governed by contract law Contract income always unrestricted 25

24 Recording Funds Think about your systems! Majority of income is GAG (restricted revenue) Majority of spend is from GAG (educational operations and restricted revenue) Keep records of Other income i.e. donations, sponsorships, fundraisers, grants. What was it for? Have you spent it on the intended item? It will keep your auditor happy! 26

25 Treatment of I&E in the SOFA identifying and tracking activities under standard specified headings : Generating funds Charitable activities Other/ Governance The above are then subdivided into further specified headings on the face of the SOFA Further analysis is then disclosed in the notes to the accounts 27

26 Analysis of Activity Headings cipfa.org.uk Generating Funds Incoming Resources for Voluntary Income i.e. donations, gifts in kind, EFA capital grant Activities for generating funds i.e. fundraising, sale of goods, property lets, shop sales Investment income i.e. dividends, interest and rents Resources Expended in respect of; Voluntary Income i.e. fundraising literature Fundraising Trading i.e. cost of goods sold including staff & premises associated with this Investment management costs i.e. fees 28

27 Charitable Activities : Funding for the Academies Educational Operations Incoming Resources e.g Resources Expended e.g GAG / EFA grants- for specific for performance of a service Sale of good/services made or provided by beneficiaries of the charity Letting Non Investment property Staffing Premises Learning Resources N.B Charities SORP 2005 (para 191) requires that the resources expended on charitable activities are analysed to provide an understanding of the nature of the activities undertaken and the resources expended on their provision (disclose in notes) 29

28 Income examples Donation no conditions attached Show as Voluntary income Fundraising for new library books Show as activities for generating funds 5 hours free legal support Show as voluntary income gift in kind with a corresponding expenditure in relevant area (charitable activities / governance) 30

29 Donation example Donation of 1000 calculators for pupils Para 129 SORP assets given and held as stock for distribution recognise as Voluntary Income only when distributed with an equivalent amount held as expenditure in SOFA If calculators are sold in legal terms this is a donation but in economic terms is similar to trading so include within activities for generating funds. 31

30 Letting Example Unused caretakers house surplus to requirements used as a meeting room for council members (at a cost) Para 137 Letting & licensing of property held primarily for functional use but temporarily surplus to requirements activities for generating funds. 32

31 Funding example Funding from the LA i.e. SEN Para 145 Contractual payments from government or public authorities where these are received in the normal course of trading are shown as incoming resources from charitable activities. Usually restricted 33

32 Exercise 1 - SOFA analysis What Fund (restricted revenue, unrestricted revenue and restricted fixed assets ) do each of the items fall under? What subjective heading applies i.e. generation of funds, charitable activities, Governance See handout 34

33 Accounting Principles 35

34 Underlying Accounting Concepts Going Concern Accruals Materiality Appropriateness of accounting principles Relevant Reliability Comparability Understandability 36

35 Accounting policies Approved by the governing body Must be disclosed Note #1 Principle, bases, conventions and rules by which transactions are recognised, measured and presented in the accounts Estimation techniques where judgement required Consistent with Charities SORP, UK GAAP Accounting Standards and relevant legislation FRS 18 selection principles Charities SORP list 37

36 Accounting Policies - examples FRS 18 - Going concern Financial Reporting Council FRS 5 - Recognition income and expenditure SSAP 4 Government Grants FRS 15 - Fixed Assets Depreciation Valuation, acquisition & disposal Deminimus level for capitalisation Impairment SSAP 21 Leases FRS 12 - Provisions, Contingent Assets & Liabilities FRS 17 - Pensions FRS 8 - Related Party Transactions SSAP 9 - Stocks 38

37 Accounting for Income 39

38 Recognition of Income in the SOFA cipfa.org.uk 3 factors for recognition: Entitlement Certainty Measurement 40

39 Contracts Income Recognition Recognise income to extent obligations fulfilled Payments received in advance: Debit Bank (to account for the receipt going into the bank) Credit Deferred income (in liabilities on the balance sheet) Retain and reinvest any surplus made Always Unrestricted income 42

40 Grants Income Recognition Recognise when conditions met Condition(s) not satisfied: Within academy s control but evidence is insufficient that they will be met = deferred income Outside academy s control = deferred income Probable that conditions can be met in the future = contingent asset disclosed 43

41 Accounting for grants received Yes Conditions exist? No Condition Met? No Deferred Income Yes No Condition? Recognise in SOFA Condition (now) met? Yes Restricted? No & will not be met No Yes Return grant General Fund Fixed Asset or General Fund 44

42 Donated Assets Assets acquired at nil or less than fair value Similar concept as for grants and contributions Sit on the balance sheet at current value Donated assets should be revalued, depreciated and impaired in line with all other fixed assets 45

43 Accounting for donated assets Donated asset Debit Fixed Asset with fair value less consideration paid Condition? No Condition? Credit Donated Assets (Creditor) Yes Credit SOFA Restricted Fixed Asset Fund Condition met? No Return asset 46

44 Gifts In Kind Include if quantifiable e.g. professional fees How? Volunteer work not quantifiable Stock for distribution Dr Resources Expended Cr Voluntary Income Gifts for cash conversion Dr Resources Expended Cr Activities for Generating Funds 47

45 Accounting for capital grants Where no condition attached, credit to SOFA - Restricted Fixed Asset Fund Where Condition outstanding, credit to creditor until condition met, then to Restricted Fixed Asset Fund Unspent balance carried forward in Restricted Fixed Asset Fund Balance No Government Grants Deferred over life of the asset 48

46 Exercise 2 - Grant Accounting A.Condition or No Condition? A.Timing Recognition See handout 49

47 Liabilities and Write Offs Without Secretary of State permission: Lower of 1% of total annual income or 45,000 (per single transaction) Cumulative % total annual income per financial year per category of transaction: 2.5% or 5% if submitted timely, unqualified financial returns for the previous two financial years 50

48 Bad and Doubtful Debts Bad Debt Definitely irrecoverable Dr SOFA restricted or unrestricted (depending on income source) resources expended Cr Debtors Doubtful Debt Uncertainty of recoverability Provision Order applies Debtors balance per control account Less: Bad debts written off Amounts specifically provided = Balance on which general provision is calculated 51

49 Provision for Doubtful Debt Year 1 setting up the provision Dr SOFA restricted or unrestricted (depending on income source) resources expended Cr Provision for doubtful debts Year 2 movement in the provision Provision required x Existing Provision x Increase/(decrease) in provision required x/(x) Dr/Cr Dr SOFA restricted or unrestricted (depending on income source) resources expended with increase/(decrease) Dr/Cr Provision for doubtful debts with decrease/(increase) Debt written off against the provision 52

50 Exercise 3 Bad and Doubtful Debts How would the following appear in the accounts? Debtors at 31/08/2013 were 48,000 A bad debt of 2,500 is to be written off Specific provisions of 350 and 1,150 are to be made against two doubtful debts A general provision of 5% is to be maintained The opening balance on the provision account is 2,000 See Hand-out 53

51 Balance Sheet Accounting for Academies 2013 Edition Guidance/Publications/A/Accounting-for-Academies-Business- Solutions-for-Financial-Reporting-2013-Edition /media/files/publications/ed027.pdf 56

52 Financial Performance Statement of Financial Activities 611k Balance sheet at 31 Aug ,108k Balance sheet at 31 Aug ,719k The movement in the net assets is the same as the movement in 'funds' in the balance sheet i.e.. 9,719,000-9,108,000 = 611,000 57

53 Balance Sheet Assets- Top half of B/S Liabilities- Top half of B/S Tangible FA (notes should show cost, depreciation & NBV) Investments Stocks Debtors Cash Creditors, Accrued expenses including deferred income Provisions for liabilities & charges Pension Asset / Liability Funds- Bottom half of B/S Funds (restricted, unrestricted & pensions reserve) 58

54 Matches cash flow statement Matches SOFA 59

55 FRS 17 Retirement Benefits 60

56 Amendment relating to the recognition of local government pension surplus/deficits.any surplus/deficit on local government pension funds should be recognised against restricted funds in order to match it against GAG..If an Academy Trust and/or its auditors believe that it is more appropriate, for any reason, to recognise the surplus / deficit against unrestricted funds then they ought to do that, but will then need to disclose in their financial statements the rationale behind the decision. Source YPLA Bulletin 36 November 2011 (Young Persons Learning Agency now part of EFA) 61

57 FRS 17 accounting cipfa.org.uk Objective SOFA Location SOFA Restricted General Fund Resources Expended Charitable Activities Subjective Accounting requirement Staff Costs FRS 17 Adjustment FRS 17 requirement Current Service Cost Past Service Cost Any gain or loss on Settlement or curtailment Interest Cost / Expected Return on Assets Reverse out above Replace with contributions paid to Pension Fund ORGL Actuarial Gains & Losses Actuarial Gains and Losses 62

58 1. Amounts to be recognised in SOFA A. Current service cost increase in the present value of a defined benefit obligation resulting from employee service in the current period B. Past service cost (if any) change in the present value of the defined benefit obligation for employee service in prior periods resulting from a plan amendment C. Gain or loss on settlement or curtailment (if any) the result of actions to relieve the Academy of liabilities, or events that reduce the expected future service or accrual of benefits of employees 63

59 2. Amounts to be recognised in SOFA D. Interest Cost the expected increase in the present value of liabilities during the year as they move one year closer to being paid E. Expected Return on Assets the annual investment return on the fund assets attributable to the Academy, based on an average of the expected longterm return THEN. F. Reverse out all the above G. Replace with Employer Contributions Paid 64

60 3. Amounts to be recognised in Other Recognised Gains and Losses H. Actuarial gains and losses changes in the present value of the defined benefit obligation resulting from: a) experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and b) the effects of changes in actuarial assumptions 65

61 Example T-accounts: Pension liability/asset cipfa.org.uk DR Payments to pension fund of employer contributions E. Expected Return on Assets CR Opening balance A. Current service cost B. Past service cost C. Loss on settlements/curtailments D. Interest cost H. Actuarial losses 66

62 Example T-accounts: pensions reserve DR Opening balance F. Current service cost F. Past service cost F. Loss on settlement/curtailment F. Interest expense H. Actuarial losses CR F. Return on plan assets G. Charging Employer Contributions to SOFA 67

63 Capital 68

64 Capital The Key Principle Everything is revenue unless you can prove it s capital Just because it costs a lot doesn t mean it s capital! Acquires, constructs or enhances a fixed asset Balance Sheet expenditure 69

65 What is a Fixed Asset? FRS 15 What s an asset? An item held for use by the school To deliver service Used during more than one financial year Its cost must be reliably measured Heritage Assets separate 70

66 Acquisition and construction costs Can include: purchase price / cost of materials / donated fair value other directly attributable costs such as: employee costs site preparation initial delivery and handling costs installation and assembly costs costs of testing whether the asset is functioning properly professional fees finance (borrowing) costs (optional need stated policy) initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located where an obligation exists 71

67 What is an Subsequent Expenditure? enhances the economic benefits of the asset in excess of its previously assessed standard of performance; or replaces or restores a component of the asset that has been treated separately for depreciation purposes; or relates to a major inspection or overhaul that restores the economic benefits of the asset that have been consumed by the entity and have already been reflected in depreciation. Examples include replacement of major components e.g. a new boiler Enhancement of major components e.g. installation of double glazing Addition of extra elements e.g. additional wing to a building 72

68 Capital Accounting Repairs, however large, should not be capitalised Deminimis Set level Varies widely Revenue implications Policy for: Revaluation Depreciation Disposal and acquisition 73

69 Capital Expenditure Dr Fixed Asset Tangible Land and Buildings Plant & Machinery Intangible Asset Software Cr Cash at Bank and In Hand/Creditors With cost of purchasing/constructing fixed asset 74

70 Depreciation and Amortisation process Determine the assets that are to be depreciated Split assets into components (where necessary) Establish the depreciable amount for each unit Assess the useful life of each unit Allocate the depreciable amount over the useful life for each unit 75

71 Depreciation Asset Value 100,000 Useful Economic Life 10 years Depreciation charge 100,000/10 = 10,000 SOFA restricted fixed assets Asset Value 100,000 In year depreciation 10,000 Net Book Value 90,000 Fixed assets accumulated depreciation Dr SOFA Restricted Fixed Assets Resources Expended Cr Fixed Assets With the depreciation charge for the year 76

72 Unrestricted Restricted Restricted Total Extract Funds General Fixed Asset Statement of Financial Activities Funds Funds Incoming Resources Resources Expended On Charitable Activities - For Academy's educational operations ,000 10,000 - Governance Costs Land and Buildings Extract Tangible Fixed Assets Note Cost at 1 September Additions 100,000 Disposals - Gross Book Value at 31 August ,000 Depreciation at 1 September Charged in year 10,000 Disposals - Depreciation at 31 August , Net Book Value 31 August ,000

73 Componentisation: SORP requirements Where a fixed asset for charity use comprises two or more major components with substantially different useful lives, each component should be accounted for as a separate asset and depreciated over its individual useful life. More accurate consumption Simplistically land and buildings Remove replaced components 78

74 Triggers to consider componentisation 1. Replacement/Subsequent Expenditure 2. Acquisition 3. Revaluation Determine cost Transfer to separate record 79

75 Allocation of existing balances Property component Host Asset Balances in respect of Plant and equipment component GBV Yes GBV Yes GBV Dep n Yes (Pro rata to GBV) Dep n Yes (Pro rata to GBV) Dep n Impair t Yes in part Possibly in full Impair t Possibly Impair t Reval Reserve Residual Likely not always pro rata to GBV Yes in part Possibly in full Reval Reserve Residual Unlikely Possibly Reval Reserve Residual 80

76 Allocating balances for old original component Gross book value Use new cost of component as a proxy for the old cost of the component Need to adjust for the passage of time e.g. some form of discounting techniques or new Cost x (Remaining asset life/asset life) Where no cost incurred need to make assessment of old component s value. e.g. discounted gross replacement cost 81

77 Componentised asset register Gross Book Value Depreciation Net Book Value O/b Addition Disposal C/b O/b UEL Charged Disposal C/b O/b C/b 1/9/13 31/8/14 1/9/13 31/8/14 1/9/13 31/8/14 Pool - 100, , ,000-10,000-90,000 Pool land - 20,000-20, ,000 Pool building - 60,000-60, ,200-1,200-58,800 Pool plant - 20,000-20, ,000-2,000-18,000 Total pool - 100, ,000-3,200-3,200-96,800 Difference , ,800-6,800 82

78 Depreciation Different Assets Fixed Assets Donated Assets Investment Assets Depreciate (but not exceptions i.e. land) Don t depreciate Optional revaluation policy Regularly revalue 83

79 Revaluation of Fixed Assets Local Authority conversion value EFA valuation Optional revaluation policy Suitably qualified persons - trustee or employee 5 year rolling basis Revaluation Reserve 84

80 Historic cost of assets Life changes with revalued gross Historic cost cannot be more than carrying value so must include impairments and revaluation losses which go to the SOFA Historic cost is record of spend, depreciation and valuation losses (including impairments) 85

81 Revaluations Basics Revaluation Reserve for gains Revaluation losses group of assets common factor write out any revaluation reserve balance first Frequency Vehicles annually or Depreciated Replacement Cost Fair value - at least every five years BUT.. 86

82 Revaluation Reserve Unusable reserve Per revalued asset Revaluation gains and losses Accumulated balance of individual asset is reduced when assets are: revalued downwards or impaired depreciated disposed of 87

83 Revaluation Gains FRS 15 Tangible Fixed Assets DR DR DR Gross Carrying Amount Accumulated Depreciation Accumulated Impairment CR SOFA Other Recognised Gains And Losses (Revaluation Reserve) 88

84 (4) Revaluation example see hand-out September 2012 September 2013 Ace Academy bought a tangible non-current asset for 75,000. The useful economic life of the asset is estimated to be 5 years. The asset is revalued and is estimated to have a value of 80,000 The policy is to depreciate assets on a straight line basis. 89

85 2012/13 Entries Debit tangible fixed assets (balance sheet) Credit cash / creditors (balance sheet) 75,000 75,000 For the depreciation of the asset ( 75,000 / 5 years) Debit depreciation (SOFA / I&E ) Credit accumulated depreciation (balance sheet) 15,000 15,000 Balance sheet extract August 2013 Cost Accumulated depreciation Net book value Fixed assets 75,000 15,000 60,000 90

86 2013/14 Entries Before revaluation Revaluation Gain/loss Cost 75,000 80,000 5,000 Accumulated depreciation (15,000) - 15,000 Carrying value 60,000 80,000 20,000 Debit asset account (balance sheet) Debit accumulated depreciation (balance sheet) Credit revaluation reserve (balance sheet) 5,000 15,000 20,000 91

87 2013/14 Recalculate depreciation The asset must still be depreciated for the year Depreciation is calculated on the new value and the remaining estimated life (i.e. 4 years) Thus (80,000/4) = 20,000 Debit depreciation (SOFA / I&E ) Credit accumulated depreciation (balance sheet) 20,000 20,000 92

88 2013/14 Balance Sheet Position At the end of August 2014, the balance sheet will therefore include the following for the asset: Balance sheet extract August 2014 Cost Accumulated depreciation Net book value Fixed assets 80,000 20,000 60,000 93

89 Revaluation / Impairment loss Fall in prices? Consumption of economic benefit? Across the board? Specific asset? Revaluation loss FRS 15 Impairment FRS 11 94

90 Impairment Losses cipfa.org.uk Aim: ensure assets carried at recoverable amount Assess environment annually Examples of events which may indicate impairment: significant decline in an asset s carrying amount during the period, specific to the asset evidence of obsolescence or physical damage commitment by authority to undertake significant reorganisation significant adverse change in the statutory or other regulatory environment in which the authority operates 97

91 Annual impairment review Annual impairment review required where: a. Depreciation charge and accumulated depreciation are not material because: a. Asset has a very long useful life or b. Residual value is not materially different from carrying value b. Expected useful life of asset exceeds 50 years (therefore relatively small depreciation charge) (FRS15) 98

92 Impairment assessment flow chart Assets carried at lower of: Carrying Value Recoverable amount Higher of Net Realisable Value Value in Use 99

93 Accounting for Impairment Losses Not treated as a revaluation Don t write out any accumulated depreciation or impairment Impairments are recognised In SOFA Additional Depreciation Restricted Fixed Assets Record reasons 100

94 Impairment losses: Accounting entries Suggested accounting entries for consumption of economic benefit: CR Fixed Asset - Accumulated Impairment DR SOFA Resources Expended (as additional depreciation) Unless loss is due to general fall in prices then: CR Fixed Asset - Accumulated Impairment DR SOFA Other Recognised Gains And Losses (Revaluation Reserve) Then when balance of asset = 0 DR SOFA Resources Expended (as additional depreciation) 101

95 Disposals Accounting Policy Approval by SoS if funded by capital grant Reinvest proceeds if funded by capital grant Otherwise repay Check what your funding agreement says!! 102

96 Disposal of assets Profit (gain) or Loss Loss Net book value of asset being disposed of or transferred (academies) or written out (lease terminated early or component derecognised) + Disposal costs Profit Sale proceeds realised Extent to which the net book value of the asset and associated disposal costs exceeds the sale proceeds = loss on disposal Extent to which sale proceeds exceed net book value and associated disposal costs = profit on disposal 103

97 Disposal of Fixed Assets S.218 Charities SORP 2005: profits on disposal of fixed assets for the academy s own use are recognised in the SOFA under other incoming resources Losses on disposals should be treated as additional depreciation and included in the resources expended section of the SOFA. Where the profit or loss on disposal is material, it should be shown as a separate line (within the relevant section) on the face of the SOFA. Debit/Credit SOFA with the loss / gain on disposal Debit Credit cash with the sale proceeds net of the disposal cost fixed assets with the assets carrying value (i.e.. cost less accumulated depreciation) 104

98 Sale of a Revalued Asset In September 2014, Ace Academy now disposes of the asset for 65,000. Sales proceed of 65,000 - NBV of the asset (60,000 3 ) = Profit of 5,000. S.218 Charities SORP 2005: profits on disposal of fixed assets for the academy s own use are recognised in the SOFA under other incoming resources 105

99 Gains and Losses on Fixed Assets- Recognising in SOFA Impairment Loss Loss on disposal Gain on disposal Revaluation gains/losses Additional depreciation in SOFA Other Incoming Resources in SOFA Gains /Losses on Revaluation in SOFA 106

100 SSAP 21 Leases 107

101 Asset sales, Leases & Tenancy Agreements Secretary of State approval before: freehold sales or purchases; granting any leasehold or tenancy agreement taking up leasehold or tenancy agreement over three years. Finance leases 108

102 Key basics is it a lease? Sources: SSAP 21 - Leases A lease is contract between a lessor and a lessee for the hire of a specific asset. The lessor retains ownership but conveys the right to use the asset to the lessee for an agreed period of time in return for payment of specific rentals FRS 5 Substance over Form A key step in determining the substance of any transactions to identify whether it has given rise to new assets or liabilities for the entity 109

103 What kind of lease is it? (1) A finance lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee 90% test Implicit in the lease An operating lease is a lease other than a finance lease 110

104 What kind of lease is it (2) A worked example: Lease term: five years Annual payments: 300k Unguaranteed residual interest: 200k Fair value of the asset: 1m Initial direct costs: 25k 111

105 What kind of lease is it? (3) Year Fair value 1,000,000 Initial direct costs 25,000 Lease payments ( 300,000) ( 300,000) ( 300,000) ( 300,000) ( 300,000) Residual value ( 200,000) Net cash flow 1,025,000 ( 300,000) ( 300,000) ( 300,000) ( 300,000) ( 500,000) Implicit rate 18.02% formula is =IRR(above net cash flow) NPV of MLP - 937, formula is =NPV(implicit rate, above lease payments) % of MLP 93.77% formula is =(-NPV/Fair value) 112

106 Presenting operating lease in lessor accounts Asset on Balance Sheet + initial direct costs of the lease Usual capital accounting applies Payments received recognised straight-line basis Dr Bank Cr SOFA Incoming resources from generated funds Premiums = prepayments and amortised over the lease term Incentives deferred and recognised as benefit over the lease term 113

107 Presenting operating lease in lessee accounts No balance sheet elements Payments recognised on a straight-line basis Dr SOFA Resources Expended Cr Bank Premiums paid = prepayments and amortised over the lease term Incentives deferred and recognised as payments over the lease term No payments made: Dr SOFA Cr Voluntary Income 114

108 Leased Assets Finance Lease Dr Asset on Lessees Balance Sheet Cr Liability to pay for lower present value of Minimum lease payments or fair value of the asset Dr SOFA Cr Bank With interest element of rental payments Dr Liability to pay for it Cr Bank With principal element of rental payment 115

109 Transfer of Assets from LA to Academy 116

110 Fixed Assets Donated Asset Buildings Dr Fixed Assets Cr Restricted Fixed Asset Fund Voluntary fair value Depreciate Revalue? Fixtures, Fittings, ICT, other Fixed Assets Dr Fixed Assets Cr Restricted Fixed Asset Fund Voluntary reasonable estimate of current value 117

111 Other Transfers from LA Donated Asset Pension Liability Dr Restricted Funds Pension Reserve Cr Pension amount determined by actuary on transfer School Balances Dr/Cr Cash Cr Unrestricted Funds Voluntary Income transfer from local authority on conversion Unspent School Balance Cr Restricted Fixed Asset Fund Voluntary Income transfer from local authority on conversion Devolved capital grant Dr Restricted or Unrestricted Funds Other Resources Expended transfer from local authority on conversion Overspent School Balance Other assets & liabilities Who controls? Restricted or unrestricted? 118

112 Example disclosure Unrestricted Restricted Restricted Total Extract Funds General Fixed Asset Statement of Financial Activities Funds Funds Incoming Resources From Generated Funds - Voluntary Income - transfer from local authority on conversion 10, ,000 8,000,000 7,810,000 Fair value of assets and liabilities transferred and an analysis of recognition in SOFA Unrestricted Restricted Restricted Total Funds General Fixed Asset Funds Funds Tangible Fixed Assets - Leasehold Land and Buildings - - 8,000,000 8,000,000 Budget surplus on LA Funds 5,000 5,000 Budget surplus on Other School Funds 5,000 5,000 LGPS Pension Surplus/-Deficit - 200, ,000 Net Assets/Liabilities 10, ,000 8,000,000 7,810,

113 Thank You 120

114 DELEGATE PACK 121

115 Consolidation & MAT s 122

116 Multi Academy Trusts - Disclosure required MATs produce a single set of accounts. Info on constituent academies required on : Trustees report (trustees discretion) GAG c/f if relevant Funds note Share to each academy Deficits if any Amounts spent by each on staff (education & educational support, & other support), educational supplies & other costs Central services note (type, charging policy & actuals) LGPS 123

117 Trading Subsidiaries - Basics Non-primary purpose trading in an academy does not qualify for any of the exemptions from direct tax Common practice to conduct such activities through a trading subsidiary Such a company is liable to tax on its profits, but it is able to claim relief for any amounts donated to charity under gift aid and effectively shelter the charity s profits from tax 124

118 Trading Subsidiaries Advantages Enables activities to be carried out which are outside the charitable objects and when there would otherwise be a significant risk to the charity s assets; Avoids corporation tax by giftaiding the profits to the charity Sometimes - carry out a trade which is standard rated (VAT), - allowing VAT to be reclaimed on expenditure, whereas such an activity might be exempt under the educational exemption if it was carried out by the charity itself Disadvantages Extra admin Additional accountancy requirements Some rates relief available to a charity occupying nondomestic premises may be lost; some tax and VAT exemptions available to the charity may be lost if provided through a subsidiary company Financing? 125

119 Subsidiary Companies (1) Often set up to run trading activities profits are gift aided to AT (unrestricted funds) Consolidated group accounts required if gross income of the charity exceeds small co size (+ 500k after consolidation requirements) If subsidiaries are individually and collectively immaterial no need to do group accounts 126

120 Subsidiary Companies (2) If consolidation needed: Consolidated balance sheet for the group (parent plus subsidiaries) + one for the parent Trustees report commentary on trading performance of each subsidiary Notes specify name, shareholding, reserves, activities and relationship, amount of capital, reserves, assets and liabilities, turnover summary, expenditure, profit/loss of the subsidiary If notes clearly disclose gross income and results of the parent no need for 2 SOFA s (para SORP) 127

121 Subsidiary Companies (3) If consolidation not needed: Trustees report commentary on trading performance needed Notes still required on same areas Notes should disclose that the accounts represent the AT as an individual undertaking not as a group Notes should disclose ground on which the AT is not preparing group accounts 128

122 Do you need a subsidiary? Only profits from directly carrying out the academy s charitable purpose ( primary purpose trading) are exempt from tax Activities are only tax exempt if within the academy s charitable objects. Some academies have incorporated additional charitable objects (DfE permission needed) Fundraising events such as dinners, dances, firework displays etc. can often be arranged in a tax exempt way. While it might be unpalatable to pay corporation tax, if there is only a small liability paying the tax might be more cost effective than setting up and running a subsidiary. OR subsidiary can pay any profit to the academy under gift aid to avoid a tax liability 129

123 Journey to the new SORP Other Financial Returns for Academies cipfa.org.uk

124 Latest 2013 SORP committee consulted on a new SORP applicable from Jan 15 (published June 2014) There will be more than one SORP because charitable companies that meet any two of the following: Turnover less than 6,500,000 Total assets less than 3,260,000 Number of employees less than 50. will have the option of following: SORP based on FRS 102, or SORP based on Financial Reporting Standard for Smaller Entities (FRSSE)

125 FRS102 Key Changes? Changes to SOFA headings Accounting changes to revaluation of listed properties and investment properties Increased clarity for grant accounting, recording commitments and pension liabilities. Will apply to Sept 15 Aug 16 Accounts see Accounts Direction June 2015 or 2016? There is to be no separate Academy SORP

126 Affecting academies? Govt grants revised SORP is expected not to permit use of the accrual model. Performance model requires the grant to be recognised as soon as the grant is received where there are no performance related conditions Donated goods and services measured at fair value (to the extent they are material). Volunteer time still excluded. No exemptions from preparing cash flow statement Employee benefits accrue for holiday pay (liability)

127 OTHER FINANCIAL RETURNS cipfa.org.uk

128 The Accounts Return Financial Return Counterparty return Benchmarking return EFA aim academies to submit through a portal, straight from your system rather than completing Spreadsheets Therefore think about system set up! Purpose to consolidate data into EFA accounts and reports

129 Accounts Return March 2014 Prepared financial statements as at 31 August 2013? Yes No No further action Single Trust opened since 1 April 2013? Multi Academy Trust opened since 1 August 2013?* Will complete separate AR by Dec 14 Complete accounts return to 31 March 2014 *One for each new academy or one consolidated return for all new academies 136

130 For example Financial Return extract. Direct Costs Teaching and educational support staff costs Depreciation Amortisation Impairment Educational supplies Examination fees Staff development Staff related insurance Technology costs Educational consultancy Travel and subsistence Other direct costs Most of the Financial Return data is required in the notes to the SOFA Support costs Support staff costs Supply teacher insurance Depreciation Amortisation Impairment Recruitment and support Maintenance of premises Maintenance of equipment Cleaning Operating lease rentals - other Operating lease rentals - land & buildings Rates Water rates Energy Insurance Security Transport Catering Technology costs Other occupancy costs PFI Charges Finance lease interest Bank interest and charges Travel and subsistence

131 For example Benchmarking return extract Revenue Expenditure Teaching staff Supply teaching staff - extra note in guidance Education support staff Administrative and clerical staff Premises staff Catering staff Other staff Indirect employee expenses Staff development and training Staff-related insurance Cleaning Water and sewerage Energy Rates Rent Other occupation costs Learning resources (not ICT equipment) ICT learning resources Examination fees Educational Consultancy Supply teacher insurance Agency supply teaching staff Catering supplies Legal & Professional Auditor costs - Audit fees Auditor costs - Other fees Other insurance premiums Administrative supplies - non educational Direct revenue financing (Revenue contributions to capital) Other Interest charges for Loan and bank PFI Charges Central Recharges - MATs only

132 Budget Forecast Extract Analyse I&E over Revenue and Capital Revenue -Income EFA /DfE income LA income Voluntary income Other govt grants Generating funds Investment income Other Revenue -Expenditure Staff costs Premises Costs Operating leases Insurance S&S Other support costs Bank interest & charges PFI Loan repayment- interest Governance costs Think about setting up your systems in this format? Purpose assess financial health, help estimate funding requirements for EFA

133 F.R Additional Disclosures (1) on a new /different basis Financial commitments leases (FReM)- split between land, buildings & other Counterparty analysis of L&B & Other split between DfE Family, other government & Other. Exit packages- compulsory redundancies & other departures agreed. Show values in bandings Losses & special payments description and value of each

134 FR Additional Disclosures (2) Funding for Academy s Educational Operations Issuer (EFA, DfE, LA, other) and detail Includes all capital grants Breakdown of Governors Reimbursed Expenses Fees Travel and Subsistence Other 141

135 FR Additional Disclosures (3) Staff Costs include agency split teaching and other,permanent and temporary, recovery for secondment All Staff numbers split permanent and temporary Boarding activities subjective analysis of SOFA direct and indirect analysis of stock movement 142

136 FR Additional Disclosures (4) Software split from IT (fixed assets) Split of NBV between land and buildings Historic Cost analysis of revalued assets EFA need to identify the different pension schemes and classify them depending upon the FRS17 scheme type (eg defined benefit and defined contribution) 143

137 FR Additional Disclosures (5) Restricted Funds more analysis by DfE family Extensive conversion disclosures year 1 only Capital commitments not recognised in financial statements More detail on : PFI commitments,non cancellable contracts, contingent liabilities, elated party transactions 144

138 Other general financial reporting issues Scheme of delegation essential Write off costs carefully appraise Delegated limits ( AFH 2013) to write offs and entering into guarantees, indemnities and letters of comfort. Beyond limits seek S of S approval Policy on gifts, hospitality and awards Staff severance payments above contractual limits must follow AFH procedure (chance of success at tribunal) can self-approve individual special staff severance payments and compensation payments provided any nonstatutory/non-contractual element is under 50k

139 Other general financial reporting issues (2) Acquisition / disposal freehold L&B & disposal of heritage assets must be approved by S of S Can dispose of other FAs without approval Finance leases, taking or granting leasehold or tenancy agreement on land or buildings from another party for a lease term of more than five years - must be approved by S of S Operating leases not on L&B do not require SoS approval

140 Other thoughts? As 90%+ of Income Grants from EFA then need for short medium and long term planning of: Number of pupils Ability to attract pupils - Amount per pupil Size Pupil Premium and the number of pupils who will attract premium Grant carry overs Impact of Potential Amalgamations federation/mat Relationships with Local Partners in generating additional income and grants and funding EFA Business Plan Requirements and Budget Returns 147

141 Prevent cipfa.org.uk