INDEPENDENT SCHOOLS. End of term report. Summer 2016

Transcription

1 O INDEPENDENT SCHOOLS End of term report Summer 2016

2 CONTENTS INTRODUCTION 3 SORP FRS 102 HAS ARRIVED 4 GOVERNANCE BOARD DYNAMICS 8 FINANCE FUNCTION EFFECTIVENESS HOW FINANCE CAN HELP DRIVE YOUR SCHOOL FORWARD 10 SAFEGUARDING IN THE SPOTLIGHT BLAKE MORGAN LLP LOOKS AT THE KEY ISSUES FOR SCHOOLS 12 CYBER-CRIME AND CYBER LIABILITY INSURANCE 14

3 INTRODUCTION Welcome to the summer edition of RSM s end of term report. As I write this the country is still reeling from the shock result in the recent referendum. The impact for independent schools is unclear for those schools with overseas pupils the fall in the value of sterling has led to some parents paying fees for future years in advance- a welcome increase in cash flow. For others where several parents work in the financial industry, the outcome may be less positive. What is clear is that there will be a period of economic uncertainty following the result and no doubt we will have more to say on this subject in our next end of term report. In the meantime there are plenty of other challenges to keep schools busy over the summer. In this edition: we consider the arrival of the new charities SORP and a reminder of what you need to think about now; is your finance function helping your school to run as effectively as it can? We look at a case study from Sedbergh School; we continue our consideration of effective governance with a focus on the dynamics of the board; RSM Insurance considers how schools can insure against the risks of cyber-crimes; and Blake Morgan provide an update on the Goddard Enquiry and safeguarding legislation. Please contact one of the team or visit our website for more information on any of these issues. Have a good summer. Heather Wheelhouse Head of Independent Schools T +44 (0) heather.wheelhouse@rsmuk.com 3

4 SORP FRS 102 HAS ARRIVED The end of summer term also means year end is upon us and for 2016 this brings the added impact of a new SORP. We therefore offer this reminder of the key areas schools need to be thinking about when preparing for the year end. Which SORP? Some smaller schools may be eligible to adopt the FRSSE SORP although should be mindful that the FRSSE is being withdrawn so this is likely to be a one-year only option. You should also consider whether to adopt (or continue with) the FRSSE for your trading subsidiary accounts. Think about your transition date For schools with a 31 August year end your conversion date is 1 September Therefore the impact of any adjustments (such as property valuations or employee benefit accruals) need to be considered at this date. Presentation of your SOFA The headings introduced by SORP 2005 have been replaced by the broader income headings; donations and legacies, charitable activities, other trading activities, investments and other. Governance costs are no longer a separate SOFA heading and instead should be included within expenditure on charitable activities. Investment gains and losses can now be shown in total (with no requirement to split between realised and unrealised) but now appear above the net income/expenditure total. Governors Report The main headings and format required remain unchanged from SORP However some additional disclosures are required: Policy for key management personnel The report must explain the arrangements for setting the pay and remuneration of the school s key management personnel and any benchmarks, parameters or criteria used and you will need to think carefully about who you consider as your key management personnel. Financial effects of any significant events (and lessons learned ) Principal risks and uncertainties Including the impact of pensions and going concern. Employee benefit accruals Often referred to as 'holiday pay' but more than that. SORP FRS 102 requires: An entity shall recognise the cost of all employee benefits to which its employees have become entitled as a result of service rendered to the entity during the reporting period. All schools, irrespective of their year end, should consider whether an accrual for staff costs is required in respect of non-teaching staff if the holiday year for these employees is not coterminous with the school s financial year (some support staff may, for instance, have holiday pay entitlement running on a calendar year basis). Accruals for teaching staff costs where the school's financial year end is not 31 August - most commonly 31 July (but in some cases 30 June) is more complicated. The need for an accrual should be assessed at the transition date and the comparative balance sheet date as well as the current balance sheet date. 4

5 The key question is what has the teacher s service by the balance sheet date entitled them to? Most teachers will have provided the service stipulated in their contract (ie the teaching they are required to deliver) by the end of term. Example 1 31 July year end Assume term ends for teachers on 31 July. By 31 July the teacher has delivered all of the service required by their contract but will only have been paid 11/12 of their annual salary. Therefore the accrual at 31 July is 1/12 of the teacher s annual salary plus on costs (eg employers national insurance, pension costs). Example 2 30 June year end Assume term ends for teachers on 31 July. By the end of June, 10 out of the required 11 months have been worked by the teacher (ie 10/11 of the service has been delivered). The teacher will have been paid 10/12 of their annual salary. Therefore the accrual at 30 June is 10/132 of the teacher s annual salary plus on costs. Example 3 30 June year end Assume term ends for teachers on 10 July. By the end of June, 9.5 out of the required 10.5 months have been worked by the teacher (ie 9.5/10.5 of the service has been delivered). The teacher will have been paid 10/12 of their annual salary. Therefore the accrual at 30 June is 10/132 of the teacher s annual salary plus on costs. Many teaching contracts will contain a requirement to work during the summer holidays but this is likely to be limited to attendance for exam results, preparation days etc. Where material, the accrual should be reduced to account for days that teachers are required to work in August. Another way to assess the need for a holiday pay accrual is to consider what a teacher would be contractually entitled to if they were to resign before the financial year ended. Example 4 31 July year end Assume the teaching contract requires one term s notice to be given and term ends for teachers on 31 July. A teacher resigns at the start of the summer term. By 31 July the teacher has delivered all of their required service but will only have been paid 11/12 of their annual salary. They will still be entitled to be paid in August. Therefore the accrual at 31 July is 1/12 of the teacher s annual salary plus on costs. Previous UK GAAP was silent on the recognition of holiday pay accruals and hence the recognition of a holiday pay accrual for the first time under FRS 102 is a change in accounting policy as a result of adopting FRS 102 and should be disclosed as a transition adjustment. 5

6 Key management personnel Key management personnel is defined as: Those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. This includes governors and senior management personnel to whom the governors have delegated significant authority or responsibility for the day to day running of the charity. In addition to the requirements of the governors report above, there is also a requirement to disclosure the aggregate amount of employee benefits* paid to the school s key management personnel. Employee benefits for this purpose include employer s pension contributions. The higher earning bandings are also still required and as with SORP 2005 exclude employer pensions. 6

7 Advanced Fees 1 A simple discount is offered by the school on the prevailing fee rates payable in return for payment in advance. In this scenario, the advance payment must be treated as deferred income until the criteria for income recognition are met. The deferred income does not constitute a financing arrangement as in this scenario the school is simply offering an early settlement discount in return for advance payment under normal business terms. It is not a financial instrument and therefore does not fall to be treated under Section 11 (basic financial instruments) or Section 12 (other financial instruments). 2 Interest is paid by the school on advance fees. In this case the transaction is in substance a loan and is classed as a basic financial instrument. The financing cost is the interest paid and this must be treated as an interest expense. If the interest rate paid is below the market rate for an equivalent loan, then the loan may qualify for treatment as a concessionary loan. 3 The school offers a fixed price or a guarantee to cap the amount of fees that might otherwise be payable in return for a fixed payment that buys two or more years of services advance. In this case, the parent avoids having to pay any inflation increases (and will not benefit from any fee decreases). The cost to the school is the revenue foregone from fee increases, in exchange for which the school receives the cash-flow advantage of the lump sum prepaid. This is a type of other financial instrument where the financing cost is not an interest rate but is the financial effect of the fee increase foregone spread over the term of the arrangement expressed as a discount rate. In this scenario a financing arrangement has arisen as advance fee arrangements over an extended period are not normal credit terms. Unlike in scenario two however, this financing arrangement does not meet the criteria set out in Section 11.8 of FRS 102 for treatment as a basic financial instrument as the interest rate (ie the fee increases foregone) is not an allowable interest rate under section 11.9 of FRS 102. In scenario three the advance fees should be accounted for as a non-basic financial instrument at fair value on initial recognition, and also subsequently which in this case would mean, at each reporting date, grossing up the fees recognised in the SOFA and showing an interest charge equivalent to the fee saving. In all cases, the contractual terms of the advance fee arrangements should be reviewed to establish firstly, whether a financial instrument exists and secondly, how that financial instrument should be measured. And finally. Consider the impact of any adjustments on bank covenants and speak to your bank ahead of the year end if you forecast a potential breach. Any transition adjustments in the trading subsidiary may impact the amount of distributable reserves available for gift aid. 7

8 GOVERNANCE BOARD DYNAMICS The best performing boards of governors are more than the sum of their parts: the members of the board ideally share a common goal in the school s mission and work well together to achieve this. But a good starting point in establishing the board is to create a balance in terms of skills and expertise as well as a diversity of background and thinking. Skills assessments Obtaining the right mix of skills, experience and qualities is a key ingredient in building an effective board. The starting point in determining whether the board has the requisite expertise to make it effective is to review the attributes of existing governors. This is important because existing governors may possess a range of skills or knowledge that have not been identified or called upon. One such process that can be employed to help identify existing skills, knowledge or experience is a skills audit. Once the board has agreed that a skills audit is in the best interests of the organisation it is good practice for an individual (the chairperson, a governor, or member of the management team) to be nominated to coordinate the process. Alternatively it can be through a formal or informal group (such as a governance working party, committee or nominations committee). Before initiating the skills audit it is advisable to review the exact requirements of the organisation s governing document. This is an important consideration particularly if the skills audit is to result in a recruitment initiative as there may be restrictions on board numbers and (in some cases) the ability to appoint new governors may rest with third parties. Identifying whether there are going to be governor retirements in the near future is an important factor. Sometimes these cannot be avoided, for example, if rotation of governors is required by the governing document. If so, then it would be wise to consider the skills audit excluding the results of governors that are about to retire. This will make it easier to identify whether short-term retirements from the board are likely to take away any key areas of expertise. Carrying out the skills audit also presents a good opportunity to ask other questions to collate information that is useful to the organisation. Examples of additional questions include those aimed at identifying areas where governors may be able to become more involved as well as helping to understand the motivations behind individuals becoming governors (which can aid future recruitment). 8

9 Once the results have been analysed and recommendations determined these should be reported to the board (and/or the relevant committee). It may be appropriate to report the results of the skills audit to the board on an anonymous basis. For that reason they are sometimes carried out by an independent third party. Typical next stages would then include one or all of the following: arranging formal training for existing governors to cover any identified weaknesses; actively recruiting new governors to fill any gaps; buying-in any missing expertise; co-opting individuals with specific skills on to sub-committees; and agreeing a date for a future review of skills if no weaknesses have been identified. Training and board development One of the requirements of Charities SORP FRS 102, which is the accounting and reporting recommended practice for the charity sector, is for organisations to disclose the policies and procedures for the induction and training of governors. Having established that some gaps in the board need or must be filled by recruitment it is possible that some areas of expertise or skills could be brought to the board by the development of existing governors. Despite this being a requirement of the accounting regulations under SORP it is an aspect of board development that every organisation should consider. This also extends to informing the board about the work of the organisation and the environment in which it operates. For example, there may be an imminent change in the regulatory regime in which the organisation operates and one way of upskilling the board could be to arrange for some training en masse or appointing individual governors to become the recognised specialists. The importance of governors working together is the starting point for better board dynamics. Therefore, any tools to develop the board will ultimately benefit the organisation. Popular activities designed to integrate and provide a better understanding of teams include team building exercises and board away days. Although these may not be considered to be educational, as such events do not directly pass on knowledge; they are building the team and, therefore, contributing to board development for the good of the organisation. Board appraisal If an organisation has a governance or nominations committee then this is also well-placed to consider the individual contribution of governors. Alternatively this can be undertaken by a small working party or the chairperson. Continual appraisal of governors is considered to be an effective method of achieving engagement and ensuring that efforts are of a sufficient intensity. Some organisations implement a formal process to consider the contributions of governors and this can also extend to a 360 degree review of the board itself incorporating feedback from management and staff as well as other stakeholders. 9

10 FINANCE FUNCTION EFFECTIVENESS HOW FINANCE CAN HELP DRIVE YOUR ORGANISATION FORWARD Finance plays a critical role in the effective management and performance of successful organisations. A highly effective finance function that works alongside the business as a trusted business partner, actively contributing to the strategic aims and objectives of the business is vital to achieve success. Constant advances in technology, communications and infrastructure are placing an ever increasing pressure on finance teams to support the business in shorter timescales. Appropriate resource and effective processes and systems need to be in place to respond to these changing demands allowing finance to respond with more insightful financial information to the business and within shorter timescales. This in turn leads to improved decision-making. 10

11 RSM undertook a speedy and very credible piece of work. The team immediately demonstrated an experienced grasp of the key issues and a strong knowledge around effective finance functions. They produced a coherent and comprehensive evidence based report that will enable us to develop a finance team that is fit for our purpose. Peter Marshall Bursar, Sedbergh School Case study Sedbergh School The client Sedbergh School is a private fee paying school with annual fee income of 12.5m. The school has a number of complexities including being multi-site, operating trading and fundraising subsidiaries, currently undertaking an intensive capital programme as well as expanding the brand. While the school has grown in scale and complexity the finance function has remained with the same structure and processes for the last 10 years. What RSM did RSM s specialist finance function advisory team worked with the school over a four week period to establish the demands for finance services from the organisation and identify how the finance team could bridge the gap given the significant pressure that was already felt from existing requirements. RSM identified transactional process improvements (standardisation) to alleviate the processing burden on the finance team and enable them to undertake the more value-adding services that the school required to support the demands from the organisation as a result of the developments. As well as process changes RSM identified areas requiring systems changes to support automation of the largely manual processes. The roadmap developed has provided Sedbergh with a clear route to a more effective finance function and RSM will continue to support through the implementation. 11

12 12 SAFEGUARDING IN THE SPOTLIGHT BLAKE MORGAN LLP LOOKS AT THE KEY ISSUES FOR SCHOOLS All schools are now alive to safeguarding issues and their duties to record and report concerns. However, the Goddard Inquiry and new safeguarding guidance mean the coming months are crucial for schools to review their existing procedures, and ensure records of past allegations are in order. Goddard and your school In March 2015, the government launched an independent inquiry chaired by Hon Lowell Goddard (the "Inquiry") to consider the extent to which State and non-state institutions in England and Wales have complied with their duty to protect children from sexual abuse and exploitation, and the extent to which any failings identified have subsequently been addressed. Although only residential schools are being investigated in the initial phase of the Inquiry, other schools will be called to give evidence as the Inquiry moves forward. It is hoped that findings will be published in 2020, but no fixed timeframe has been imposed. Be prepared The Inquiry's statutory status means that institutions can be compelled to disclose documents to assist the investigation and/or be called to give witness evidence at a public hearing. It is a criminal offence to fail to comply without reasonable excuse, and also to intentionally destroy or tamper with any evidence relevant to an inquiry. If schools are called to give evidence, short timescales for compliance are likely. We therefore recommend that schools proactively monitor the Inquiry's progress and act now to: review relevant records and consider voluntarily reporting any instances of institutional failure. We strongly advise taking legal advice in such circumstances; collate and keep any potentially relevant documents and prepare for disclosure in line with the Inquiry's requirements; learn the terminology. For example, the Inquiry will refer to "non-recent" abuse, rather than "historic abuse"; check current insurance policies, and liaise with insurers to ensure the school has continuous cover for any compensation claims that could arise; and consider PR and media enquiries. As the Inquiry gathers pace, schools are likely to come under increased scrutiny from parents and the media. We strongly advise that you think now about how you will reassure parents as allegations of abuse in schools come to light, that you identify any issues that may require public comment, and that you take specialist PR advice before issuing any statements. Compliance with latest guidance Schools should also revisit their existing safeguarding policies to ensure they are up-to-date and legally compliant. An updated version of the government guidance 'Keeping children safe in education' was published this month for schools in England, and will replace the existing guidance from 5 September The changes include new provisions on staff training and additional sections on online safety and peer-on-peer abuse. Independent schools should be aware of a new requirement to ensure those in management roles have not been prohibited from teaching. For more information or bespoke advice about the legal issues addressed in this article, please contact James Simpson at Blake Morgan LLP on or james.simpson@blakemorgan.co.uk.

13 13

14 CYBER-CRIME AND CYBER LIABILITY INSURANCE Schools are not immune to the threats of cyber attack, data theft, unauthorised access or IT failure. The type of data handled by schools can be attractive to criminals, such as medical records, passport numbers and parent financial information. There are usually a wide range of entry points to your systems for staff, pupils and parents, some of which may not be protected. Many schools have IT systems that are decentralised out of necessity, which in itself creates security control issues. Wi-Fi networks accessed by large numbers are an easy entry point for criminals. Instilling a culture of secure systems and procedures and recognising threats is vitally important in minimising the risks. In recent years insurance covers have become available and examples of the covers are shown opposite to highlight the potential impact of system failures, misuse or attacks. Privacy notification costs Provides the legal costs, including postage and advertising, incurred by the school in notifying parents and fee payers that a network or privacy breach has occurred, which might compromise their data. Multimedia liability This covers the school for claims against them of defamation, libel and slander, and unintentional infringement of intellectual property rights such as copyright, plagiarism or piracy. Network security and privacy liability Covers the liability of the school should it fail to prevent the transmission of a virus, or a denial of service attack to another network, or destroy data that has been entrusted to them by a third party, or fail to prevent the unauthorised disclosure of confidential information. 14

15 Credit assistance expenses Fees incurred by the school in the procurement of professional credit monitoring services or identity theft assistance for individuals affected by a network or privacy breach. Crisis management expenses Expenses incurred by the school for legal and professional advice for media strategy, crisis consulting and independent public relations services following a breach. Forensic expenses Costs incurred for specialist forensic auditors or investigators to conduct a review or audit to substantiate how the breach occurred. Electronic data rectification expenses Reasonable costs and expenses incurred to repair or restore your computer system to the standard immediately before it was damaged or destroyed by a network security breach. Cyber extortion Covers the school for extortion demands where there is a credible threat to destroy your computer system or website, or a threat to introduce a malicious code or a denial of service attack. Cyber business interruption Protects the school against loss of business income following a network security breach that results in total or partial interruption to your computer system. PCI fines and penalties Payment Card Industry (PCI) fines or penalties arising from a network or privacy breach due to non-compliance with Payment Card Industry Data Security Standards. 15

16 FOR MORE INFORMATION PLEASE CONTACT Heather Wheelhouse Head of Independent Schools T +44 (0) heather.wheelhouse@rsmuk.com Kerry Gallagher Audit Director T +44 (0) kerry.gallagher@rsmuk.com Simon Loughran RSM Insurance Services T +44 (0) simon.loughran@lucasfettes.co.uk Simon Atherton Consulting Director T +44 (0) simon.atherton@rsmuk.com rsmuk.com The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm each of which practises in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number ) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug. RSM UK Consulting LLP, RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. RSM Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM and Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice. RSM Insurance Services Limited is an Appointed Representative of Lucas Fettes and Partners Limited. Lucas Fettes and Partners Limited are authorised and regulated by the Financial Conduct Authority RSM UK Group LLP, all rights reserved. 1966