Academies 2011/12 reporting part 2: the financial statements

Academies 2011/12 Year-End: What you need to know about the financial statements

The first article considered the relevant reporting requirements contained in the Academies: Accounts Direction 2011/12 issued in August 2012 (AAD).  This second article considers the financial statements that are prepared by the governors’ and covers the following:

• Statement of financial activities
• Income and expenditure account
• Balance sheet
• Cash flow statement

The third article in the series will consider the detailed notes required to an academy’s statutory financial statements.

STATEMENT OF FINANCIAL ACTIVITIES

The statement of financial activities (SoFA) is a requirement of the Charities Statement of Recommended Practice (SoRP) and shows all incoming resources and resources expended during the year.  In addition, it also shows how the academy has used its resources to further its objectives for charitable purposes.  The SoFA shows whether there has been a net inflow or outflow of resources which includes gains and losses on capital assets and provides a reconciliation of all movements in the academy’s funds.

All incoming and outgoing resources are analysed between:

• Unrestricted fund(s);
• Restricted general fund(s); and
• Restricted fixed asset fund(s).

Comparative figures are not required for this analysis.

Unrestricted fund(s)

These are resources which can be spent on any purpose of the academy at the discretion of the academy’s governors.

Restricted general fund(s)

These are resources which can only be spent on particular purposes and the 2011/12 AAD includes the following in restricted general funds:

• EFA General Annual Grant (GAG);
• Other EFA grants;
• Other government grants;
• Sponsorship of particular projects or activities;
• Boarding activities if these are undertaken; and
• Gifts and donations with restrictions attached (i.e. received for specific purposes).

Restricted fixed asset fund(s)

These are resources that are to be spent on capital items and the 2011/12 AAD includes the following:

• DfE/EFA capital grants;
• Other government capital grants; and
• Sponsorship monies received for capital projects.

If an academy has an ‘endowment fund’, this must be shown in an additional column.  This type of fund is a restricted fund that is held on trust to be retained for the benefit of the academy as a capital fund.  The income can be spent on specific purposes for which it was received (restricted income) or it can be spent at the discretion of the governors (unrestricted income).  Any income should not be shown within the endowment column unless new endowment capital has been received in the period.

The 2011/12 AAD requires the line items in the SoFA to be divided into three categories as follows:

• Generation of funds (incoming resources);
• Charitable activities; and
• Governance costs.

Generation of funds

The 2011/12 AAD requires this category to be sub-divided into:

• Voluntary income (such as gifts, donations, sponsorship, subscriptions, gifts in kind and donated goods or services);
• Activities for generating funds (fundraising events, letting of property (other than investment property) and shop income); and
• Investment income (interest on investments and rents received from investment property).

The 2011/12 AAD also requires expenses incurred on generating funds to be sub-divided into:

• Costs of generating voluntary income (such as fundraising, advertising and marketing);
• Fundraising trading (cost of goods sold); and
• Investment management costs.

The 2011/12 AAD is specific on the treatment of all income and expenses – they should be shown gross and not offset against one another.

Charitable activities

Grants from the EFA and income from boarding pupils should be included within charitable activities incoming resources.  Expenditure incurred relating to EFA grants should be expenditure which directly relates to the academy’s objectives (which is the provision of education).  Costs relating to boarding pupils should be disclosed under charitable activities expenditure, and this expenditure should be analysed between ‘direct provision’ and ‘support’ costs in the notes to the financial statements.

Expenditure on the direct provision of education includes:

• Teaching costs;
• Teaching support (classroom assistants and laboratory technicians);
• Premises costs; and
• Depreciation of equipment used for teaching.

In respect of boarding pupils, expenditure on direct provision of boarding must include:

• Cost of goods and services; and
• Any other costs incremental in the provision of the boarding facility.

Expenditure in respect of educational support costs includes the costs of directly administering and supporting the school (such as admissions, pupil records etc).  Boarding support costs will include the direct costs of supporting that activity (such as staff costs, utilities, rent and rates, repairs and maintenance and such like).

Governance costs

These types of costs relate to both direct and related support costs in respect of the governance of the academy such as:

• Internal/external audit fees.
• Costs in relation to legal advice relating to constitutional and statutory requirements.
• Statutory accounts preparation.

Other recognised gains and losses

The 2011/12 AAD requires other recognised gains and losses to be split between:

• Gains and losses on revalued fixed assets (but not impairment losses);
• Gains and losses on investment assets; and
• Actuarial gains and losses on defined benefit pension schemes.

If the academy recognises an impairment loss on its fixed asset(s) or incurs a loss on the disposal of any of its fixed assets, these should be treated as additional depreciation charges and included in the resources expended section of the SoFA as opposed to being included as other losses.  Conversely, if the academy makes a gain on the disposal of a fixed asset, this gain should be reported under ‘Other incoming resources’ in the SoFA.

Incoming resources and resources expended

The 2011/12 AAD requires expended resources to be allocated to:

• Charitable expenditure;
• Fundraising costs; and
• Governance costs.

The 2011/12 AAD recognises that the majority of salary costs and other costs will be directly attributable to the above classifications.  However, it also recognises that in some cases expended resources may be divided between academy business (charitable activities) and fundraising activities.  Where such situations arise, the costs are apportioned on a reasonable, justifiable and consistent basis.

All resources expended that relate to the GAG funding are restricted.

Sponsorship income

These were a key part of the academies programme (pre Academies Act 2010) which was then replaced by an endowment model which entailed the sponsor creating an endowment fund and the academy trust would receive income from this in the form of interest.  There is no longer a requirement for academies to obtain financial sponsorship.

If sponsorship money can only be used for purposes specified by the sponsor, the income is restricted and recognised in the SoFA on a receivable basis.  If the income is for the acquisition of fixed assets, it is shown in the ‘Restricted fixed asset fund’ column of the SoFA and included in the ‘Restricted fixed asset fund’ balance on the balance sheet.  If it is income for specific non-fixed asset purposes it is shown within the ‘Restricted general fund’ column of the SoFA and any remaining balance at the year-end is included in the ‘Restricted general fund’ on the balance sheet.

Income from sponsors that can be used for general purposes at the discretion of the academy’s governors should be shown as unrestricted income on a receivable basis, with any remaining balance being included in ‘Unrestricted funds’ on the balance sheet.

Endowment income should be shown in the ‘Endowment fund’ column in the SoFA and included in the ‘Endowment fund’ on the balance sheet.

Fixed asset purchases

An academy receives a GAG in order to cover its running costs.  The GAG can be used in part for the purchase of fixed assets.  When this takes place, the academy is required to account for the purchase as a fixed asset on the balance sheet, and transfer the amount of the purchase from the restricted general fund to the restricted fixed asset fund.  Depreciation charges in respect of such fixed assets will be allocated to the restricted fixed asset fund column in the SoFA.  Please note that the 2011/12 AAD states that transfers to the fixed asset fund from GAG should only take place once the fixed assets have been purchased.

INCOME AND EXPENDITURE ACCOUNT

It is worth pointing out at the outset than an income and expenditure account may not be required because the SoFA (see above) includes all gains and losses which would be found in both the income and expenditure account and the statement of total recognised gains and losses.  As a result, an academy would be required to prepare an income and expenditure account where activity cannot be separately identified in the SoFA, such as:

• Movement on endowment (capital) funds in the year; and
• Unrealised gains and losses in the year (most of these are included in the SoFA below the point at which a traditional income and expenditure account would end, hence there is no need to prepare a separate income and expenditure account).

If an academy’s income and expenditure account would not include the items above, no separate income and expenditure account is needed.  However, paragraph 9.24 of the 2011/12 AAD requires the headings in the SoFA to be amended so that:

• The title clearly indicates that it includes an income and expenditure account and statement of total recognised gains and losses (if required); and
• There is a prominent sub-total entitled ‘Net income/(expenditure) for the year’ which replaces, or is in addition to, the heading of ‘Net incoming/(outgoing) resources for the year’.

The 2011/12 AAD acknowledges that an academy will have unrealised gains and losses in relation to its participation in the Local Government Pension Scheme (LGPS), but goes on to state that if such amounts are included below the sub-total ‘Net income/(expenditure) for the year’ and the title of the SoFA is changed in accordance with paragraph 9.24 of the 2011/12 AAD, the academy will not have to present a separate income and expenditure account.

However, when an academy has a movement on an endowment fund in the year, it will need to present both an income and expenditure account and a statement of total recognised gains and losses showing separately:

• Gross income from all sources;
• Net gains/losses from disposal of fixed assets belonging to the academy trust’s income funds;
• Transfers from endowment funds of amounts previously received as capital but converted into income funds for expending (conversion of an expendable endowment);
• Total income (for all incoming resources – other than revaluation – of all the income funds but not for any endowment funds);
• Total expenditure out of the academy trust’s income funds; and
• Net income or expenditure for the year.

BALANCE SHEET

An academy’s balance sheet should be shown in the following order:

Tangible fixed assets

Values for tangible fixed assets should be shown on the face of the balance sheet at net book value, with the notes analysing tangible fixed assets between cost, depreciation, impairment (if any) with a final analysis of net book value.  The 2011/12 AAD requires the following categories of tangible fixed assets to be shown:

• Land and buildings (analysed between freehold and leasehold);
• Furniture and equipment;
• Computer equipment and software;
• Motor vehicles; and
• Assets under construction (if applicable).

Investments

Investments are shown as either fixed or current assets and only those investments which the trustees intend to realise (turn into cash) without reinvestment are shown in current assets.  The 2011/12 AAD requires all investment assets to be included in the accounts at market value.

Stocks

To accord with the principles in SSAP 9 Stocks and Long-Term Contracts, stocks should be valued at the lower of cost and net realisable value.

Debtors

These include amounts owing to the academy and expenses that have been prepaid.  Any debtors that fall due after more than one year should be shown separately in the notes to the financial statements and where long-term debtors are material in the context of total net current assets, these should be displayed separately on the face of the balance sheet to accord with the principles laid down in UITF Abstract 4 Presentation of Long-Term Debtors in Current Assets.

Cash at bank and in hand

This category should include all bank accounts including any petty cash balances.

Creditors

This category includes all amounts owed by the academy, including accrued expenses and should be split between creditors falling due within one year and after more than one year from the balance sheet date.

Defined benefit pension scheme asset/liability

The deficit or surplus on a defined benefit pension scheme, as calculated in accordance with FRS 17 Retirement Benefits should be included in this category and shown on the face of the balance sheet.

Restricted fixed asset fund

The cumulative amount carried forward to the next accounting period in respect of funding received for the specific purpose of fixed assets.  The majority of this fund will be from government funds, but can include other funds from a sponsor or other donations.

Restricted general fund

This is the cumulative amount carried forward for funding received for the academy’s running costs excluding fixed assets. Again, the majority of this fund will be from government funds, but it can also include other funds from sponsors or other donors.

Pension reserve

This represents the surplus or deficit on a defined benefit pension scheme and is a restricted fund.  When an academy recognises a pension surplus (an asset) or a deficit (a liability) this will result in the creation of a pension reserve and any pension liability (representing a deficit in the pension scheme) will be shown as a negative in the pension reserve.

Endowment funds

This represents the total amount of capital funds held in trust from sponsors under a deed of gift which may be permanent or expendable.

Unrestricted fund

These are funds which are available for general use and shown on the face of the balance sheet and reconciled to the total unrestricted funds amount shown in the SoFA.

CASH FLOW STATEMENT

The accounting standard in UK GAAP which governs the presentation of a cash flow statement in statutory accounts is that of FRS 1 Cash Flow Statements.  FRS 1 requires the cash flow statement to be presented using the following standard headings:

• Operating activities;
• Dividends from joint ventures and associates;
• Returns on investments and servicing of finance;
• Taxation;
• Capital expenditure and financial investment;
• Acquisitions and disposals;
• Management of liquid resources; and
• Financing.

Please note, that not all of the above headings will be required for individual academies.

In addition, the academy should show the following reconciliations in the form of additional notes that link the cash flow statement to the other primary financial statements:

• Net incoming/(outgoing) resources to net cash inflow from operating activities; and
• Net cash inflow to movement in net funds/(debt).

Conclusion

The third (and final) article in the series considers the detailed notes to the financial statements that an academy is required to disclose.  The 2011/12 AAD does contain model financial statements for Coketown Academy Trust which are a useful resource to refer to during the course of preparing financial statements (or auditing them) for academies.

Category: Accounting and standards, Audit