Academies Accounts Direction 2017 to 2018

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1 Academies Accounts Direction 2017 to 2018 Our summary of the key changes trustees and finance staff need to be aware of. The Education and Skills Funding Agency (ESFA) have published the Academies Accounts Direction (AAD) 2017 to 2018, which is the guidance pack for academy trusts and their auditors to use when preparing their annual reports and financial statements for accounting periods ending on 31 August 2018, or for trusts preparing short period accounts beginning What has changed? 1 September 2017, a point which we will expand upon later. The AAD contains a summary of the main changes, however we have once again produced our own summary of these changes along with our commentary and views on the implications, drawn from our extensive sector knowledge and experience. The main changes academy trustees and finance staff need to be aware of are: All financial statements to be submitted to the ESFA four months after the accounting reference date The AAD clarifies that all trusts, not just the majority preparing accounts to 31 August, must submit financial statements within four months. This is reasonable and is not actually a change in requirements; the ESFA slipped this into the AAD but did not highlight it as a change. Accounts are prepared to a different period end where the final academy is transferred out of the trust, for example a trust transferring out its final academy on 31 March would prepare accounts to that date. These would be due to be filed by 31 July. During the current year the ESFA have contacted relevant trusts personally to remind them that they expect accounts to be submitted within four months, although they appear to have been fairly relaxed about this provided trusts maintain contact and keep the ESFA informed so they are aware of when to expect the accounts.

2 Two additional disclosures have been introduced and one of these in particular could be quite time consuming for larger trusts. It affects all trusts who have had more than 49 full time equivalent employees throughout any Winding up inactive trusts Trusts are known as inactive once their final academy has been transferred out. Usually the trust will be dissolved at some point once this has happened, and in our experience this process usually begins once the final cessation accounts have been submitted. Once the Academies Accounts Return has also been submitted a trust has fulfilled its reporting obligations to ESFA. The AAD now suggests that the trust should not be wound up until the following 1 September, since in section it talks about the absence of an active funding agreement as at the start of an academic year and goes on to state that such companies are no longer deemed to be academy trusts and may seek dissolution. seven months within the accounting period. Trustees report changes Two additional disclosures have been introduced and one of these, in particular, could be quite time consuming for larger trusts: Information on trade union facility time in trustees report to comply with the Trade Union (Facility Time Publication Requirements) Regulations Information on fundraising practices to comply with the Charities (Protection and Social Investment) Act The first of these is a potentially difficult task that will require some preparation. It affects all trusts who have had more than 49 full time equivalent employees throughout any seven months within the accounting period. The AAD contains examples disclosures on pages 20 and 21, but the information required includes: The number of employees who were relevant union officials during the period (on both a headcount and FTE basis) The number of employees and their percentage of time spent on facility time, split across certain bands. The percentage of the pay bill spent on facility time. Time spent on paid trade union activities. The new fundraising disclosures require information on: Approach to fundraising. Work with, and oversight of, any commercial participators/professional fundraisers. Fundraising conforming to recognised standards. Monitoring of fundraising carried out on its behalf. Fundraising complaints. Protection of the public, including vulnerable people, from unreasonably intrusive or persistent fundraising approaches, and undue pressure to donate.

3 The trade union disclosures could be quite onerous for large The benefit of including the 24 month summary will be to iron out many of the fluctuations that can occur between two periods. trusts with numerous employees affected. Trusts that are around the 49 full time equivalent employee threshold will also need to be careful, due to a strange requirement which means the legislation is relevant where there are more than 49 employees for any seven months. Few academy trusts carry out any detailed fundraising activities and so the second new requirement is likely to be less onerous, however with budget pressures we are seeing an increasing amount of trusts turn to more professional fundraising. Fundraising expenditure now needs to be split between direct and support costs. Expanded funds note (again!) The AAD introduced a combined 24 month Funds Summary note which covers both the current accounting period and previous accounting period, ie. 1 September 2016 to 31 August Last year the AAD introduced the need to include a prior year Funds Summary note, in order to comply with the Charity SORP. This latest change goes one step further. The benefit of including the 24 month summary will be to iron out many of the fluctuations that can occur between two periods. For example, it is not uncommon for a particular fund to show a surplus one year, followed by an in-year deficit the following year using the brought forward balance. The 24 month summary will show the combined position which may be helpful to trustees and other readers of the accounts. The software companies that have to fit in yet another expansion of this note may not be so pleased!

4 Further clarification is provided over the treatment of land and buildings in church academies where a site is not recognised as land and buildings in the accounts, but this still leaves two alternative treatments that will lead to inconsistencies. Church academies Further clarification is provided over the treatment of land and buildings in church academies where a site is not recognised as land and buildings in the accounts [8.4.3]. The AAD does not go as far as to stipulate the required accounting treatment and offers two options: Recognise a site improvement asset even though the site itself is not recognised as land and buildings. This would be analogous to leasehold improvements for a lessee. Include the expenditure in the Statement of Financial Activities (SoFA) as a grant to the church body, with a note explaining a grant applied on improvements to diocesan property occupied by the academy trust. The AAD also makes it clear that any capital grants received by church academies should still be recognised when received. Sometimes the expenditure will be incurred by the church body rather than the academy trust itself, and in these instances the grant should not be shown as income from charitable activities but matched to the corresponding grant expenditure to the church body. The clarification is welcome but does still leave two alternative treatments which will lead to inconsistencies. Our view is that it would generally be preferable to capitalise property costs incurred by the trust as site improvements, since there will usually be a long term benefit to justify the inclusion of an asset. Either way, clear disclosures of the adopted treatment will be necessary. Apprenticeship Levy Last year the AAD required costs incurred under the Apprenticeship Levy to be shown as a separate line within the staff costs note. Now the AAD asks for levy costs to be included with social security costs in the same note [8.13.4]. Some academy trusts are already beginning to access Apprenticeship Levy funded training and this needs to be recognised as notional income and notional expenditure in the SoFA. The 10% top up funding provided by the government should also be recognised in the same way [8.13.5].

5 The Levy was introduced in April 2017 so there was little time Trusts should ensure that their accounting systems can provide an analysis of income and expenditure through their Teaching Schools in sufficient detail for before the publication of last year s AAD to consider the accounting treatment. Trusts that have accessed training and the 10% top up will need to ensure they have accounted for this correctly before their year-end. Recognising the notional income and expenditure means that the accounts reflect the substance of the transactions even though there is no direct cash impact. We would encourage trusts that have not yet accessed the training to do so; if funds are not used within 24 months they will be lost the new note. Teaching school disclosures Further disclosures are introduced for trusts which operate as Teaching Schools. A trading account breaking down income and expenditure in detail is now required. The AAD contains an example in note 36 of the model financial statements on page 65. The AAD also makes it clear that the status of the Teaching School needs to be determined in order to consider if it is part of the academy trust or has a separate legal identity. Some disclosures for Teaching Schools were introduced last year, with income and expenditure passing through the trust shown on separate rows in the SoFA. The enhanced disclosure this year will cover a page for most trusts and is similar to the board trading account for trusts with boarder pupils that has been required for a number of years. Trusts should ensure that their accounting systems can provide an analysis of income and expenditure through their Teaching Schools in sufficient detail for the new note.

6 This change is no doubt in response to the various headlines over the past year which have led to an ever increasing focus on related party transactions. Related party transactions Related party transactions must now be clearly separated between income and expenditure items. The AAD example disclosure shows any expenditure related transactions listed first, with income transactions perhaps a donation from a trustee or connected entity shown afterwards. The disclosures required for any related party expenditure in excess of 2,500 have been tightened up further and trusts must now state for each such transaction that: It has been provided at no more than cost. The related party has provided a statement of assurance confirming this. This is no doubt in response to the various headlines over the past year which have led to an ever increasing focus on related party transactions. Of course, if a trust has not complied with the at cost requirements then this would be a breach of the Academies Financial Handbook and should be disclosed in the Accounting Officer s Regularity report and/or the auditor s assurance report on regularity. The AAD also introduced a subtle change that is not referred to in the ESFA s own summary of changes. There has been a requirement to disclose details where any close family of a trustee or member works for the trust in order to comply with the Charities SORP. Technically this required disclosure of the individual s name, role and the salary paid. UHY have taken a pragmatic view on this in most cases in recent years, disclosing merely the existence of the relationship and making it clear that the trustee or member had no involvement in the recruitment process and the employee receives no special treatment or beneficial salary as a result of the connection. The AAD includes an example disclosure on page 63 mirroring the treatment we have adopted to date.

7 The wording of the new AAD suggests that any expenditure on alcohol is seen to be irregular and so we would recommend that, to be safe, trusts do not purchase any alcohol at all, for any reason. Regularity... not alcohol again Section of the AAD draws attention to the common themes where ESFA or auditors find irregularity. These centre around controls such as lack of prior approval for finance leases, non-compliance with connected party transaction rules, non-contractual severance payments made without the required approvals, or general weak internal controls. Section then moves on to discuss other occasional incidents of irregularity and provides a link to a recent ESFA investigation report. A few examples are provided in the AAD, and the last bullet point refers to irregular expenditure not for the purpose intended, e.g excessive gifts and alcohol. We have spoken to the ESFA about expenditure on alcohol, and the pragmatic view to date seems to be that trivial expenditure on alcohol for reasonable reasons, as long as it comes from unrestricted income, is not a large problem. Nevertheless, the ESFA continue to refer to expenditure on alcohol in their investigation reports, and for this reason we sometimes refer to it in our own external and internal audit management letters where we identify such expenditure. It has always been a grey area, and the odd purchase of a bottle of wine, maybe as a thank you, or at a staff Christmas party, is probably thought of as acceptable by most people. However, the wording of the new AAD suggests that any expenditure on alcohol is seen to be irregular and so we would recommend that, to be safe, trusts do not purchase any alcohol at all, for any reason.

8 This is a clear attempt by the ESFA to ensure full transparency over transactions between academy trusts and their trading subsidiaries and can only be welcomed by trusts operating trading subsidiaries for honest and good reason. Consolidated accounts A growing number of academy trusts have a subsidiary company through which any trading activities are channelled. These trusts have to prepare group accounts consisting of the consolidated results of the academy trust itself and its subsidiaries. Where a subsidiary is 100% owned, groups can usually take advantage of an exemption not to disclose details of transactions between group companies. The AAD removes the right for academy trusts to use this exemption. For 2018, the related party transactions note must disclose all inter-group transactions and cannot take up the exemption afford in paragraph 33.1a of FRS102 [section 7.6.3]. This change is another not highlighted by the ESFA in their own list of changes. It is a clear attempt by the ESFA to ensure full transparency over transactions between academy trusts and their trading subsidiaries and can only be welcomed by trusts operating trading subsidiaries for honest and good reason. We therefore find it a little strange that they chose not to draw attention to it. Hopefully we should start to see a reduction in the number of negative media articles highlighting connected party transactions which do nothing for the sector as a whole, indeed with the Public Accounts Committee s recent report recommending that academies seek ESFA approval for all related party transactions going forward it is perhaps easy to see where this may be heading.

9 For the second AAD in a row there have not been a significant number of changes. The subtle amendments and enhancements are positive and should help consistency THE NEXT STEP You can read the full AAD here. For the second AAD in a row there have not been a significant number of changes. The subtle amendments and enhancements are positive and should help consistency and understanding of financial reporting requirements for academy trusts. If you have any questions or concerns over our summary, or indeed in respect of reporting requirements for academies more generally, please contact your usual UHY adviser or find your local academy expert on our website at and understanding of financial reporting requirements for academy trusts. FOLLOW OUR DEDICATED ACADEMY SCHOOLS BLOG Our academy schools blog covers the latest issues that may affect you and your school. From digital and technological updates and the latest changes to legislation, to funding and alternative income suggestions and governance advice, our blog will keep you up-to-date with everything you need to know. UHY Hacker Young Associates is a UK company which is the organising body of the UHY Hacker Young Group, a group of independent UK accounting and consultancy firms. Any services described herein are provided by the member firms and not by UHY Hacker Young Associates Limited. Each of the member firms is a separate and independent firm, a list of which is available on our website. Neither UHY Hacker Young Associates Limited nor any of its member firms has any liability for services provided by other members. A member of UHY International, a network of independent accounting and consulting firms. This publication is intended for general guidance only. No responsibility is accepted for loss occasioned to any person acting or refraining from actions as a result of any material in this publication. UHY Hacker Young