Academies 2011/12 reporting part 3: the notes

The first two articles in this series considered the reports required to be prepared by the governors’ and the detailed financial statements that accompany these reports (excluding the auditor’s report which is beyond the scope of these articles).  This final article considers the detailed disclosure requirements that academies are required to make in their annual financial statements.

Introduction

Additional disclosures required under UK GAAP and the SoRP should be made in the notes to the financial statements.  The 2011/12 AAD considers the notes to the financial statements at section 9.5 and these notes are extensive.  The notes required are the same as for any other charitable company, but academies are required to include a note identifying any unspent GAG which has been carried forward to the next accounting period (see later in the article).

Note on accounting policies

Accounting policies are the basis on which the financial statements are prepared and include principles, bases, conventions and rules by which transactions are recognised, measured and reported in the financial statements.  Estimation techniques are also used in recording the value of incoming and outgoing resources and must be appropriate in order to give a true and fair view.

An academy is required to regularly review its accounting policies and new policies should only be adopted when new accounting standards require such policies, or if the new policies would result in the financial statements providing a fairer presentation of the results and financial position of the academy.  Where the academy implements a material change to an accounting policy, it must apply that change retrospectively (in other words, do a prior year adjustment) so the financial statements reflect the change in accounting policy as if the revised policy had always been in existence.  Additional disclosure notes are required where accounting policy changes are applied retrospectively.

The 2011/12 AAD suggests the following accounting policies that should be covered by academies.  However, it is important to emphasise that the 2011/12 AAD does acknowledge that the following policies are not exhaustive and may need to be amended to reflect individual circumstances.

Basis of preparation

Academies will prepare their financial statements using the historical cost convention.  For academies that have investment assets, they would need to adopt a historical cost convention as modified by the inclusion of investments at market value because such assets are required to be carried in the balance sheet at fair value.  The basis of preparation should also include a statement by the governors that the financial statements have been prepared in accordance with applicable law and accounting standards and in accordance with the requirements of the Accounts Direction.

Going concern

The Financial Reporting Council issued guidance in October 2009 for directors of UK companies which related to going concern and liquidity risk.  The 2011/12 AAD requires academies to familiarise themselves with this guidance as it recognises the FRC’s guidance as best practice and recommends including the disclosures regarding the assessment of the going concern principle for academies.

Recognition of incoming resources

Academies should include their policy for the recognition of each type of material incoming resource and will normally be on a receivable basis.  The 2011/12 AAD requires academies to include policies for:

• Basis of recognition of GAG and other grants including those for fixed assets and how the grants are analysed between the different types of incoming resources;
• Gifts in kind and donated assets/services:
• Assets donated by third parties are recognised at their fair (open market) value in the period in which they are receivable in incoming resources, where the benefit to the academy trust can be reliably measured.  An equivalent amount should be recognised in the appropriate fixed asset category and depreciated over its expected useful economic life on a basis consistent with depreciation policy for that category.
• Also under this category might be services in kind i.e. time provided by the sponsor.  These incoming resources should only be included in the SoFA where the benefit to the academy trust is quantifiable and measurable.  The value of these services should be the estimated value to the academy trust of the service; this will be the price the academy trust estimates it would pay in the open market for the service.  An equivalent amount would be included in expenditure under the appropriate heading in the SoFA.  The notes to the accounts should give an analysis of donated services.  The accounting policies should indicate the basis of the valuation used.

Resources expended

Academies will need to make sure their accounting policy cover their policy for the recognition of liabilities, which also includes constructive obligations (liabilities that arise due to past practice rather than a legal obligation).  Academies also need to include a policy for differentiating between charitable activities, costs of generating funds and governance costs.

When costs need to be apportioned between different activities, academies need to disclose the underlying principles involved in the allocation of costs, and where the costs apportioned are material, academies need to make further disclosures as to the method of apportionment including the proportions used to undertake the calculations.

Accounting for fixed assets

The 2011/12 AAD requires an academy’s policy for accounting for fixed assets to include:

• The basis for inclusion of tangible fixed assets (which is expected to be cost);
• The value below which items are not capitalised as fixed assets;
• The policy for buildings under construction;
• Accounting for assets funded by grants;
• The rates of depreciation; and
• Policy with respect to impairment reviews.

In cases where an academy has received a fixed asset by way of gift or donation, the initial carrying amount should be the fair value on the date the academy received the fixed asset.

Impairment reviews should also be carried out on fixed assets to ensure that they are not carried in the balance sheet at any more than recoverable amount.  Where there is evidence of impairment, academies will have regard to FRS 11 Impairment of Fixed Assets but academies should also refer to the SoRP at paragraph 268 which refers to ‘service potential’.

Depreciation should be charged on all fixed assets, with the exception of freehold land and academies should determine appropriate rates of depreciation based on fixed assets’ useful economic lives and expected residual values when fixed assets are acquired.

FRS 15 Tangible Fixed Assets permits assets to be revalued.  However, the 2011/12 AAD acknowledges that it is unlikely the academies will revalue their tangible fixed assets.  In cases where the revaluation model is used for fixed assets, academies must adopt a full valuation every five years by a qualified valuer.  Where it is likely that there has been a material change in value in the intervening years, then an interim valuation must take place.

Any grants received for the acquisition of fixed assets are credited to the restricted fixed asset fund in the SoFA.

Leases

The 2011/12 AAD prohibits academies from taking out finance leases without the permission of the Secretary of State because they represent borrowing.  Operating lease rentals are charged on a straight-line basis over the life of the lease, unless another more systematic and rational basis is more appropriate.

Investment assets

Investments are always shown as a separate category within fixed assets and carried at market value at the balance sheet date.  Any changes in the market value are reported in the ‘Gains and losses on investment assets’ section of the SoFA, regardless of whether they are realised or unrealised.  Investment assets that are reported in current assets are also carried at market value and must only be reported within current assets if there is an intention to realise the asset without the reinvestment of the disposal proceeds.

Stock

Where the academy has material items of stock, these should be reported in the financial statements at the lower of cost or net realisable value.

Pension benefits

Academies will have defined benefit obligations for:

• The Teachers’ Pension Scheme England and Wales (TPS); and
• The Local Government Pension Scheme (LGPS).

Both schemes are multi-employer schemes.  In respect of the LGPS, the academy will be able to identify its share of assets and liabilities on a consistent and reasonable basis, hence will report a surplus (asset) or deficit (liability) on that scheme within its financial statements.  The TPS is accounted for as a defined contribution scheme (i.e. contributions are recognised as they are paid each year) because the academy’s share of assets and liabilities cannot be identified on a consistent and reasonable basis.

Provisions

Academies can only recognise a provision in the financial statements when the three criteria laid down in FRS 12 Provisions, Contingent Liabilities and Contingent Assets are met (which is the academy has a present, legal or constructive obligation as a result of a past event, it is probable that a transfer of economic benefit will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation).

Contingent liabilities

Contingent liabilities are liabilities whose existence will only be confirmed by the occurrence of one or more uncertain future events which are beyond the academy’s control.  Contingent liabilities are disclosed in the financial statements, and are not recognised as monetary amounts as they fail to meet the recognition criteria laid down in FRS 12.

Contingent assets

Contingent assets are the opposite of contingent liabilities and are again assets whose existence will only be confirmed by the occurrence of one or more uncertain future events not wholly within the academy’s control.

Funds

Funds represent the incoming resources the academy has received which have not been spent in the year.  A brief description should be made relating to the different types of funds held by the academy which should also include a policy for transfers between funds and allocations to, or from, designated funds.

Other notes

The 2011/12 AAD at paragraph 9.5.26 outlines some of the additional disclosures that may be needed in academies’ financial statements and the 2011/12 AAD does offer some guidance on some of the additional notes – notably ‘The funds notes’, ‘Related party transactions including governors’ remuneration and expenses’ and ‘Staff costs’.

Of particular relevance to academies is the ‘Note on GAG carry forward calculation’.  Academies are permitted to carry forward an amount of GAG equal to 12% of the GAG awarded for the year unless the DfE have agreed to vary this limit.

An illustrative GAG carry forward disclosure note is shown below:

Conclusion

The disclosure notes required in academies’ financial statements are extensive and reference to chapter 9 and the model financial statements shown in Coketown Academy Trust will need to be made to ensure that the financial statements for the year ending 31 August 2012 comply with the Companies Act 2006, Charities SoRP and applicable accounting standards.

Category: Accounting and standards, Audit