Oct

23

Academies 2011/12 reporting part 1: the report

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This is the first of three articles which explain the requirements of the Academies: Accounts Direction 2011/12 (AAD) and focuses on the reporting aspects of academies.  The second article will consider the financial statements themselves and the final article will look at the detailed notes that are required in academies’ financial statements.

Introduction

1 August 2011 saw all academy trusts become exempt charities and this status is reflected in section 12(4) of the Academies Act 2010.  This means that academies are now regulated by the Department for Education (DfE) and the DfE is assisted in this regulation by the Education Funding Agency (EFA).  The ‘exempt charities’ status means that academy trusts are not required to register with the Charities Commission and those that had previously registered have now been automatically deregistered.

Academies are charitable companies and are therefore required to comply with the Companies Act 2006 and the Charities Act 2011.  Academies are also required to comply with the Statement of Recommended Practice – Accounting and Reporting by Charities (revised) (‘The SoRP’).  These requirements includes preparing financial statements that give a true and fair view and which must be independently audited by an external auditor.  Paragraph 1.4 of the 2011/12 AAD requires the financial statements to include:

  • Incoming resources from all sources receivable in the period.
  • Resources expended on all activities within the period.
  • All assets and liabilities of the academy trust at the balance sheet date.
  • Notes to the accounts.

These audited financial statements, together with a copy of the auditor’s management letter must be submitted as scanned electronic documents in PDF format by e-mail to AcademiesFinancialMonitoring.EFA@education.gsi.gov.uk by 31 December 2012.

In preparing and auditing financial statements, accountants and auditors must have regard to, and fully understand, the AAD which was issued in August 2012.  This version of the AAD supersedes the AAD for 2010/11.  The AAD is not intended to be a substitute for referring to applicable accounting standards and legislation and the AAD acknowledges that academy trusts must refer to full accounting standards.

Updates reflected in the 2011/12 Academies: Accounts Direction (August 2012) (‘AAD’)

The 2011/12 AAD supersedes that of the 2010/11 AAD and reflects the following requirements that will affect the accounts preparation and audit of academies financial statements for 31 August 2012 year-/period-ends:

  • Academies are to prepare annual reports and financial statements to 31 August 2012.
  • These ‘accounts’ are to be audited by independent registered auditors.
  • The audited accounts must be submitted to the Secretary of State via the EFA by 31 December 2012.
  • File the accounts with the Companies Registrar as required under the Companies Act 2006 (for most Academies the deadline for this filing is 31 May 2013).
  • The 2011/12 AAD introduces developments in the accountability and audit framework for academy trusts as follows:
  • the ‘statement on internal control’ is replaced with a ‘governance statement’ which provides information on the governance structure of the academy trust;
  • the 2011/12 AAD introduces a new ‘Statement on Regularity, Propriety and Compliance’ which is an important new element of the assurance framework for academies.  It requires the academy’s accounting officer(s) to formally confirm their responsibilities ensuring regular and proper use of the academy trust’s funds have been delivered;
  • the auditor is required to carry out additional work on the Statement of Regularity, Propriety and Compliance (see below) to provide assurance that governing bodies are meeting their responsibilities under the Funding Agreement.  This ‘opinion’ is required to be addressed to the Secretary of State through the EFA; and
  • if timely accounts are provided, no Financial Management and Governance Evaluation (FMGE) returns need to be carried out.  However new academy trusts that will not be producing financial statements until 31 August 2013 will be required to complete a revised, shorter FMGE for their first year only.
  • Where academies have boarding facilities, the reporting requirements have been clarified (notably the inclusion of a trading account for boarding activity).
  • There is a new section in chapter 4 of the 2011/12 AAD describing the differences in financial reporting requirements for academy trusts in their first year following conversion.

Content of the annual report and financial statements

The 2011/12 AAD splits its overview of the financial statements into two component parts:

  • Report; and
  • Financial statements.

Report

The annual report must include the following:

  • a governors’ report;
  • a governance statement;
  • a statement on regularity, propriety and compliance;
  • a statement of governors’/trustees’ responsibilities; and
  • independent auditor’s reports.

Financial statements

The financial statements must comprise:

  • a statement of financial activities;
  • a balance sheet;
  • a cash flow statement;
  • a statement of accounting policies; and
  • other notes to the financial statements.

In certain circumstances, an academy trust may also include an income and expenditure account and a statement of total recognised gains and losses (but this is not always the case and the situations where an income and expenditure account and statement of total recognised gains and losses are required are covered in the second article in the series which looks at the financial statements).

Governors’ report

The 2011/12 AAD refers to ‘governors’, ‘directors’ and ‘trustees’.  These terms are interchangeable if the governors are the same people as the trustees of the academy (and also the directors of the company limited by guarantee).  However, where the governors are not the same people as the academy’s trustees, and a statutory statement is required, the term ‘governors’ should be replaced with ‘trustees’.  The governors’ report is a legally separate document, but is published with the financial statements.

The governors’ report explains what the academy’s objectives are and how it is trying to achieve those objectives and the report must meet the requirements for a directors’ report as outlined in sections 415-419 of Companies Act 2006 as well as the requirements of a ‘trustees report’ outlined in the SoRP.  The governors’ report must also include a business review including principal risks and uncertainties as well as additional information to give a greater insight into the academy’s activities and achievements.

The 2011/12 AAD says that the governors’ report should cover the following:

  • reference and administrative details;
  • structure, governance and management;
  • objectives and activities;
  • achievements and performance;
  • financial review;
  • plans for future periods; and
  • funds held as custodian trustee on behalf of others.

To comply with the requirements of Companies Act 2006, the governors’ report should also cover:

  • employees and disabled persons (where the average number of employees exceeds 250);
  • fixed assets (where the market value of land and buildings is materially different to the net book values reported in the academy’s balance sheet);
  • charitable donations (where these exceed £2,000); and
  • governors’ indemnities (where any third party indemnity provisions are existing during the year or on the date of approval of the governors’ report).

Additional information is also required in the governors’ report relating to the academy’s reserves policy.  This additional information should include:

  • why reserves are held;
  • what level or range of reserves is considered appropriate for the academy trust;
  • what the level of reserves is at the year-end;
  • how the academy trust is going to achieve the desired level of reserves; and
  • how often the reserves policy is reviewed.

Pension fund issues

In many situations, an academy will recognise a deficit in respect of the Local Government Pension Scheme (LGPS) and invariably this deficit is likely to be significant.  The deficit should be included within restricted funds and including this deficit may result in a negative restricted funds balance being reported.  When this occurs, the reserves disclosure should explain that an immediate liability does not arise for this amount; conversely if the academy recognises a pension surplus an immediately realisable asset does not arise.

As the SoRP requires disclosure of the circumstances giving rise to the deficit, including the steps being taken to eradicate the deficit, the reserves policy should explain that a surplus or deficit on the LGPS will have a cash flow effect over a period of years, being that of an increase or decrease in employers’ pension contributions.

Public benefit reporting

Charitable organisations are required to have objectives that are for the benefit of the public, as required in the Charities Act 2011, and the governors’ report must contain an explicit statement that the governors have had regard to the Charity Commission’s guidance on public benefit.  The 2011/12 AAD provides an example statement at paragraph 4.6.1 which says:

‘In setting our objectives and planning our activities the governors’ have given careful consideration to the Charity Commission’s general guidance on public benefit.’

The governors’ report must also include ‘a review of the significant activities undertaken by the academy trust during the relevant financial year to further its charitable purposes for the public benefit’.

Governance statement

As an academy is in receipt of public funds, a governance statement must be included within the annual report.  In addition, HM Treasury requires such a statement by all public bodies.  The governance statement is signed by the chairperson and the academy’s accounting officer.  The ‘Scope of Responsibility’ section is the same for all academies and the text for this section can simply be lifted from the Coketown Academy Trust model accounts contained in the 2011/12 AAD, but tailored if the principal is not the academy’s accounting officer.  The remaining sections of the governance statement must be specifically tailored to the academy’s circumstances, and these sections are:

  • Governance;
  • Purpose of the system of internal control;
  • Capacity to handle risk;
  • Risk and control framework;
  • Review of effectiveness; and
  • New academies in the period.

Statement on regularity, propriety and compliance

The statement on regularity, propriety and compliance is a new introduction for academies’ 31 August 2012 year-ends.  The statement is a formal declaration by the academy’s accounting officer that they have met their personal responsibilities to Parliament for the resources under their control during the year.  The objective of the statement is primarily twofold: firstly it serves to assure the academy’s governing body and secondly it provides an efficient basis for obtaining assurance by the EFA and DfE.

Auditors are required to undertake work on the academy’s statement of regularity, propriety and compliance.  The 2011/12 AAD refers to an ‘audit opinion’.  However, the regularity reporting requirement for 2011/12 is an extension of the opinion previously given on the use of EFA/DfE funds and involves the auditor reaching a conclusion on the regularity of all funds, regardless of source, together with the regularity of income.  A ‘conclusion’ involves limited assurance, hence less work involved by the auditor, whereas a reasonable assurance opinion requires more work.  To guide auditors, the Institute of Chartered Accountants in England and Wales (ICAEW) has published Technical Release TECH08/12AAF.

The nature and extent of the work to be performed will be determined by the individual auditor and therefore the EFA has not published specific guidance due to the diversity of the academies sector but the 2011/12 AAD requires audit programmes to have regard to AAF 01/10: Framework document for Accountants’ Reports on Grant Claims which was issued by the ICAEW.

It is to be noted that where academies produce timely financial statements, they will not be required to send FMGE returns, although new academies that will not produce financial statements until 31 August 2013 will be required to complete a revised, shorter FMGE for their first year only.

Engagement letters between academies and auditors should include a standard paragraph which acknowledges their duty to the EFA and this is reproduced below:

‘The Secretary of State for Education acting through the Education Funding Agency has, in the Accounts Direction dated August 2012, made an unequivocal statement that it has adopted the Standardised Terms of Engagement included within AAF 01/10 “Framework document for Accountants’ Reports on Grant Claims” issued by the Institute of Chartered Accountants in England and Wales.  We will report to the Secretary of State for Education acting through the Education Funding Agency in accordance with those Standardised Terms of Engagement for Independent Accountants’ Reports.  The Secretary of State for Education acting through the Education Funding Agency will not be required to sign this engagement letter’.

Statement of governors’ responsibilities

The statement of governors’ responsibilities follows on from the governors’ report, the governance statement and the statement of regularity, propriety and compliance.  It sets out the governors’ responsibilities in respect of:

  • preparing the governors’ report and financial statements;
  • maintaining adequate accounting records;
  • safeguarding the assets of the charitable company; and
  • preparing financial statements that show a true and fair view.

In addition, the statement of governors’ responsibilities must also explain the financial reporting framework that has been applied, which will be UK Generally Accepted Accounting Practice and the Academies: Accounts Direction 2011/12 issued by the Education Funding Agency.

 

 

Category: Accounting and standards, Audit

About the Author ()

Steve Collings is the audit and technical director at Leavitt Walmsley Associates Ltd and the author of 'Interpretation and Application of International Standards on Auditing'. He is also the author of 'IFRS For Dummies' and 'The AccountingWEB Guide to IFRS'. More about Steve's publications can be found by clicking on the 'Published Work' tab on the homepage. Steve is also a regular contributor of articles to www.accountingweb.co.uk, the UK's largest resource for professional accountants on a free subscription basis and is a member of the Society of Authors. Steve is an Editorial Board member for Wiley Insight IFRS and sits on the AAT's Financial Reporting Technical Panel. In 2011 Steve was named 'Accounting Technician of the Year' at the British Accountancy Awards and won 'Outstanding Contribution to the Accountancy Profession' by the Association of International Accountants in 2013. Follow Steve on Twitter - @stecollings

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