Financial reporting in schools and academies: Background information 1/9 Introduction The management of the finances of a school or academy is not the responsibility of the headteacher or principal. This task should be delegated to a school business manager (SBM), finance director or other suitably qualified person. However, headteachers and principals are the recipients of financial reports and statements and need sufficient understanding of their contents to enable them to: make judgements about the financial health of the school evaluate the financial sustainability of the school s long-term development plans challenge the information they are provided with The following notes will not make you an accountant and if you have serious concerns about your school s accounts you should always seek expert professional advice. Your professional development If on appointment to a headship you feel that you would benefit from developing your understanding of school financial accounting and reporting you may wish to follow one of these strategies: Ask an appropriately qualified and experienced person to walk you through your school s accounts, pointing out any issues, explaining terms etc. Enrol on an appropriate short course in strategic financial management. Academies and schools: reporting requirements The financial reporting requirements for academies and schools differ because they have a different legal status. These differences are explained below: Maintained schools Maintained schools are not obliged to publish accounts as such but are required to submit a return, via their local authority, as part of the consistent financial reporting (CFR) regulations introduced in April 2003. This information is used to populate the schools financial benchmarking website and to pre-populate the section 251 outturn statements. In January 2011, for the first time, the Department for Education (DfE) published all schools CFR data for 2009-10 as part of the coalition government s data transparency agenda. All maintained schools are required to follow financial reporting procedures laid down by their local authority in their scheme for financing schools (made under section 48 of the School Standards and Framework Act 1998) and associated local documentation. Academies Academies are charitable trusts and companies limited by guarantee and are required to submit audited annual financial statements to Companies House. The form of the financial statements is set by the Companies Acts and the Charities Statement of Recommended Practice (SORP). Academies report in most cases to a 31 August academic year-end.
2/9 Terms and concepts common to school and academy accounts Accountancy, in common with all professions, has its own language and it is useful to make sure that you understand the meaning of key terms and their significance. The list below is not exhaustive but includes some of the main terms you may encounter. Accruals An accrual is an adjustment made at the end of the year to account for income and expenditure in the correct year, for example where goods or services have been received in one year but the invoice will be paid in the following year due to timing differences. This is important at the end of the financial year. Failure to account for accruals could lead to a budget deficit the following year. Budgetary control This is the process of ensuring actual expenditure and income do not exceed the budget available and taking corrective action where variances are identified. Schools must have processes in place to ensure that their expenditure does not exceed income. An example of a budgetary control is putting a limit on the amount individual account holders can spend above which they must seek approval. Budget monitoring This is the process of reviewing actual expenditure or income against the sum allocated for the year, enabling action to be taken to reallocate budgets to or from other budget lines in a timely manner where variances are found. In practice this will often be achieved through regular reports to the governors finance committee. Capital expenditure This refers to money spent to either acquire or improve an asset owned by the school which will be used over a period of years. In schools, capital expenditure refers to the purchase of building, land and equipment. Clawback If the school s carry forward at the end of a financial year is above a limit set by the local schools forum, any funds above the limit may be subject to clawback, ie the surplus funds are returned to the local authority. The figures for clawback often vary between primary and secondary schools. Typical figures have been 5 per cent for secondaries and 8 per cent for primaries and special schools. As a headteacher it is essential that you know the policies adopted by your schools forum.
3/9 Commitments A commitment arises when an order is raised to purchase goods or services but the goods or services have not yet been received. When analysing a budget it is important to understand not just how much has been spent but also what commitments there are to get a true picture of the budget. Consistent financial reporting CFR refers to the coding system used for schools to report their spending to their local authority and the DfE. Cost centre The overall school budget will be allocated to a number of different cost centres. Examples of cost centres in secondary schools may be individual subject departments, continuing professional development (CPD) and cleaning supplies. Each cost centre has its own budget holder who is responsible for managing the account, authorising orders etc. General ledger The general ledger is the main accounting record of the school. It is basically a record of financial transactions. Outturn At the start of the financial year the school or academy will set its budget knowing that some expenditure items will be estimates (for example the amount to be spent on energy). The outturn figure represents the actual amount that was spent on each item and this is the figure that appears in the school s final accounts. Petty cash This is a small amount of cash to purchase minor items of expenditure such as postage stamps. Revenue expenditure Revenue expenditure is that which is incurred by the school on a day-to-day basis in the provision of services. Variation A variation is an increase or decrease in an element of the budget after the budget has been approved at the start of the year. It is important that variations are monitored, explained and accounted for. For example, if there is a variation in the supply teacher budget that has resulted in an overspend, this should be explained (eg, it may have been caused by an outbreak of flu) and accounted for by moving funds into the supply teacher account from another cost centre (referred to as virement). Virement Virement is the movement of resources between cost centres, or of budget lines within a cost centre.
4/9 School accounts Most schools present what are known as simple income and expenditure accounts which are usually generated from computerised accounting packages. The income side of the accounts records the school s sources of funding, and the expenditure provides a breakdown of the main items the school spends its income on. Academy accounts Academy accounting requirements are very different from those for maintained schools. Headteachers moving to a headship in an academy from a maintained school are advised to familiarise themselves with the information in the Academies Financial Handbook (the handbook) and the guidance provided by the Education Funding Agency (EFA). Charitable companies Academies are publicly funded independent schools, free from local authority control. Other freedoms include setting their own pay and conditions for staff, freedom from following the national curriculum, and the ability to change the lengths of their terms and school days. Section 12 of the Academies Act 2010 (the Act) requires that the only body that can be a qualifying academy proprietor has to be a charity. Also that charity has to: be a company be limited by guarantee have its registered office in England or Wales have as its object a charitable purpose be an exempt charity A company To be the qualifying proprietor of the academy, a limited liability company registered under the Companies Act 2006 or earlier act must be used. This is a separate legal entity and the company will be required to follow company law, which includes the requirements on accounting records, annual accounts, directors report, distribution and filing of the annual financial statements and the independent audit. These are different from the requirements that apply to maintained schools. Limited by guarantee The company does not have share capital. Every member of the company undertakes to contribute to the assets of the company in the event of its being wound up while he or she is a member, or within one year after he or she ceases to be a member, such amounts as may be required.
5/9 A registered office situated in England or Wales All companies must have a registered office, which is likely to be the academy address, and this must be in England or Wales. An object that is a charitable purpose All companies used to have an objects clause, which set out the purposes for which the company was set up. Under the Companies Act 2006 companies generally no longer need an objects clause. However, the Academies Act 2010 requires that the qualifying academy proprietor has to have an object expressed in its articles or memorandum of association (or each of whose objects as so expressed). For an academy the object is a charitable purpose, ie the provision of educational services. The memorandum and articles of association are formal legal documents that govern the relationship between the company and others as well as the constitution of the company. Exempt charity Following the Academies Act 2010, exempt charities are exempt from registering as charities with the Charity Commission since they will be regulated instead by the sponsoring government department (the DfE through the EFA). So the accounts and annual report will not have to be sent to the Charity Commission. However, as the academy is being run by a charitable company whose financial statements will need to show a true and fair view, the Charities SORP (2005) still applies to the charitable company. More information about charitable company status can be found on the Charities Commission website (www.charity-commission.gov.uk). SORP Academy status is intended to offer flexibilities but that greater degree of flexibility results in a need for a greater degree of control and accountability. Being a company limited by guarantee offers personal protection for those running the organisation, but third parties and suppliers dealing with a limited company are faced with greater risks and hence the need for additional reporting requirements. Company and charity law brings a key requirement, in the context of financial reporting, that academies must prepare and publish a governors report and audited accounts in a prescribed format on an annual basis.
6/9 Truth and fairness The handbook requires that financial statements should be prepared each year and should give a true and fair view of the academy s financial position at the balance sheet date, and of the financial activities and cash flows for the period ended on that date. They should 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 at the balance sheet date all cash received and expended within the period notes to the accounts The concept of true and fair means that the academy s financial statements should be: materially correct, ie in the respect that the information is significant to a reader, and is correct (but we probably don t need to count every paper clip to value our stock for the accounts!) free from bias; perhaps surprisingly the preparation of accounts involves judgement and some areas will be subjective The above implies that users of the accounts need to be protected from bias. Where significant judgements are made, these need to be properly disclosed. Consolidated accounts This section only applies to those academies that have incorporated a separate company as a subsidiary. The academy may incorporate a separate company as a subsidiary to carry out certain activities to make profit which can then be covenanted to the academy. If the academy does not meet the exemptions detailed below it will have to produce consolidated accounts incorporating the results of the subsidiary as well as its own accounts. Consolidated accounts are prepared on the basis that the academy and its subsidiary are regarded as a single entity, and the results of the two entities are aggregated on a line-by-line basis. The exemptions from the requirement to prepare consolidated accounts are as follows: The results of the subsidiary are not material. That means that even if the subsidiary was consolidated, the balance sheet of the academy in isolation and the consolidated balance sheet of the academy and subsidiary together are virtually identical; or the gross income of the academy and its subsidiary does not exceed 500,000.
7/9 Elements of the report and financial statements The handbook (chapter 5) states that the report and financial statements should include: governors report independent auditors report statements of financial performance: statement of financial activities summary income and expenditure account statement of total recognised gains and losses (STRGL) balance sheet cash flow statement accounting policies and notes to the accounts supplementary detailed income and expenditure account A brief explanation of each of these elements is provided below. The financial statements and notes will be explored in more detail in subsequent units. Governors report The governors are jointly responsible for the preparation of an annual report in addition to the financial statements (accounts). Although the report is a legally separate document from the accounts, they are presented together in the same publication. The governors report should describe what the academy is trying to do and how it is going about it, demonstrating whether and how the academy has achieved its objectives during the year and explaining its plans for the future. There are specific legal requirements for the governors report, which are outlined in the handbook. Independent auditors report The governors report and financial statements must be supported by a report setting out the independent auditors opinion on them. An audit is an exercise whose objective is to enable auditors to express an opinion on whether: the financial statements give a true and fair view of the academy s affairs at the period end, and of its income and expenditure for the period then ended the financial statements have been properly prepared in accordance with the applicable reporting framework (for example, relevant legislation and applicable accounting standards such as the Companies Act and the Charities SORP) proper accounting records have been kept by the academy throughout the financial year grants made by the DfE have been applied for the purposes intended the information in the governors report is consistent with the financial statements Academies should hope to obtain an unqualified audit opinion, meaning that the auditors find the financial statements to be true and fair and with no qualifications to their audit opinion.
8/9 Statements of financial performance Financial statements include a number of statements that set out the financial performance of the academy: statement of financial activities summary income and expenditure account statement of total recognised gains and losses (STRGL) Each of these statements explains the financial performance of the academy on an accruals basis. They present performance for the year from a different perspective: The statement of financial activities looks at the overall financial performance and explores the relationships between the academy s financial activities and academy funding. The summary income and expenditure account provides a high-level summary of income and expenditure for the year on an accruals basis. The STRGL acknowledges that to fully measure financial performance, there may occasionally be other events where the financial impacts have not yet been realised but which could be relevant to users of the accounts (if for example a property owned by the academy had doubled in value). Balance sheet The balance sheet shows the financial position of an academy. The balance sheet will set out the three elements of a statement of financial position: assets liabilities ownership interest (in the case of an academy, its funds) The fundamental difference in focus between a balance sheet and the performance statements is that the balance sheet is a snap-shot at a point in time, equivalent to a financial photograph, whereas the performance statements are analogous to a video recording that show how the academy arrived at that year-end position. The format and headings for the balance sheet are laid down in the handbook. A balance sheet will balance as ultimately any change in the net assets of the academy will be explained by its funding. For example, if an academy has used some of its funding to invest in new property, assets at the top of the balance sheet will have increased, but these will be counterbalanced by changes in the cumulative funding at the bottom of the balance sheet.
9/9 Cash flow statement In addition to understanding the performance of an academy on an accruals basis, it is also clearly critical for any organisation to properly manage and report its performance in cash term. In this context, cash does not mean notes and coins, but refers to all types of funds coming into the school which overwhelmingly will be through bank transfers. Academy accounts therefore include a cash flow statement which reports financial performance in cash terms. As the title suggests it will analyse and report cash received in the year and cash paid. It provides the explanation for how the financial position of the academy has changed over the period in question. Accounting policies and notes to the accounts When an academy reports its financial position and performance, the figures presented will be affected by the academy s choice of accounting policies and the estimation techniques used. There is at times a perception that accounting is a very precise science. In reality there is a significant degree of judgement involved. In certain areas of accounting, estimates have to be used, for instance how certain assets such as office equipment might need to be depreciated. The cost of those assets will often be reasonably certain but the academy s directors will have to estimate their expected useful lives and any residual values. Different directors will not choose exactly the same period or amount and consequently the figures reported will be subject to the different estimates. There is in financial reporting this degree of subjectivity. Once more the accounts will tell users what estimation techniques have been used. In particular the accounts will say over what period the tangible fixed assets are being depreciated. It will be important for those reading the accounts to know what policies have been adopted by an academy and therefore these policies should be explained with the financial statements. Additional information on financially significant issues is also required in order to aid users of the accounts in understanding the information provided. Some notes may provide workings or a breakdown of particular balances in the primary financial statements, while others may provide relevant information on matters not covered elsewhere (for example future financial obligations or commitments). Supplementary detailed income and expenditure account Academies are required to prepare and submit a detailed income and expenditure account to the DfE to support the statutory financial statements. The detailed income and expenditure account provides a further analysis of the financial information provided in the summary income and expenditure account.