Accounts Direction and Handbook updates
The 2023 Academy Accounts Direction (AAD) brings some straightforward clarifications into reporting for the 2022/3 academic year. The ESFA has:
- clarified how the trustees should use the AAD and explains that the trustees are not expected to have detailed understanding of technical accounting requirements and should seek help from the CFO where required
- clarified expectations for interim arrangements in the absence of key signatories. Adequate coverage is always required, and an accounting officer must be in place at all times
- updated feedback on non-compliance with the AAD. Consistency and accuracy of the annual report, forward planning for deadlines and inclusion of all AAD and model accounts requirements are areas that have been flagged for improvement
- updated the themes arising from the ESFA’s assurance work. This shows that 0.5% of 2021 accounts were qualified (due to the LGPS valuations) and 7.9% had a modified regularity opinion
- enhanced the AAD in response to school buildings’ safety risk
- updated the guidance on the treatment of loans. This includes consideration on the classification of concessionary loans and the SORP’s accounting policy choice on such loans (fair value or balance less repayments)
- reminded the sector that material income sources must be separately disclosed in note 4
- clarified that teaching assistants are categorised as support staff within the staff costs note.
The Academy Trust Handbook 2022 is effective from 1 September 2022 for the year to 31 August 2023 and again includes a few minor changes from the previous edition:
- The requirement to prepare the budget forecast outturn report has been removed.
- But the budget forecast return is still required (to be submitted by 31 August 2023).
- Prior ESFA approval for staff severance payments for employees earning more than £150,000 only applies to ‘special’ severance payments (i.e., those which have a non-statutory or non-contractual element).
Defined benefit pension schemes
The landscape for pensions has changed in 2023 and for the first time in some years, organisations are expecting to report a surplus, rather than a deficit, at the end of the year, resulting in a net asset position. This is primarily attributable to the improved funding levels in the Local Government Pension Schemes (LGPS) and changes in actuarial assumptions, particularly those around mortality, along with a higher discount rate.
Under FRS 102, a defined benefit pension asset can only be recognised to the extent that the surplus is recoverable through reduced contributions or a refund from the scheme.
At the time of writing, the ESFA is yet to provide guidance on this specific issue. However, ESFA representatives were lobbied quite strongly at the last auditor forum meeting, where representatives from the ICAEW also attended and spoke on this matter.
Management should consider, with reference to the respective admission agreement whether future economic benefits are available. If there is an assumption that employers will participate in the LGPS indefinitely, then it is unlikely that they will be entitled to a refund.
However, surpluses arising from schemes may be realised through a reduction in the employer’s contribution rate. Early liaison with management’s expert (actuary) on the matter is encouraged to understand the potential value of any future economic benefit and therefore the restriction on assets recognised. This may give rise to a key source of estimation uncertainty in the financial statements which requires further disclosure.
In lieu of additional guidance for the sector, we refer academy trusts to FRS 102 section 28, which provides some indicators to consider when determining if an asset can be recognised.
Cyber risk is defined as the risk that information and communication systems are exposed to dangerous actors, elements or circumstances that can cause loss or damage. In other words, it is the risk of data and other sensitive information being damaged, lost or otherwise compromised because of technological interference or attack.
Conversely, cybersecurity relates to the systems and controls in place that are designed to prevent data and electronic information from such attacks, as well as to detect attacks should they occur.
Ransomware is when data is stolen and held to ransom, usually for a large payment in crypto currency. The data is often sold on the dark web if the ransom is not met.
Several not-for-profit organisations, mainly in the education sector, came under attack in August 2020. This affected the systems and data of schools, academies, colleges, and universities. Student and staff data was stolen and posted on the Dark Web and there was widespread disruption – in some cases, students could not sit final exams or register for the new academic term.
In October 2022, the Charity Commission released a report stating that at least one in eight charities had been subject to some form of cybercrime in the last 12 months, and that less than a quarter of charities had implemented a formal policy to address and manage the risk of cyber-attacks. Only around half (55%) of charities report that cyber security was a fairly or very high priority in their organisation. This is a concerning statistic give that the Allianz Risk Barometer of January 2022 suggested that cyber perils outrank Covid-19 and broken supply chains as the top global business risk. The Grant Thornton UK Cyber Defence Centre calculates that the average cost of a breach is £2.7m, meaning that cyber is a very real threat.
Boards should seek assurance that their policies and processes are appropriate and are implemented, and academies should read the small print and work with their insurers from the outset. Good governance is essential, in particular where affordable insurance premiums are not available, and prevention rather than cure and self-insurance may be the only options for some organisations.
For academies, the risk can be extensive as the resources and funds available to prevent or detect an attack may not be as strong as in a large company. It may take 3-6 weeks before an academy is again operating in a safe environment following a ransomware attack, and up to 6 months for an academy to fully recover – and this is always assuming the academy is aware that it has been subject to an attack.
This is the financial reporting exposure draft which the FRC issued in draft in December 2022. FRED 82 proposes a number of changes. Of note, the proposals include: a new model of revenue recognition in FRS 102 and FRS 105; a new model of lease accounting in FRS 102; and various other incremental improvements and clarifications.
The first area that may change is around leases. FRED 82 proposes that only finance accounting will apply – essentially this means that operating leases will not exist. The changes will bring all leases onto the balance sheet. Currently, FRS 102 categorises leases based on the ‘risks and rewards’ of the assets but FRED 82 classifies leases by ‘who has control’. This means that leases are recognised as right of use assets with a corresponding liability.
This will be a major change for a lot of not-for-profit organisations. But there are some practical expedients which are suggested which will make any transition smoother.
Second, FRED 82 proposes major changes to revenue recognition: FRED 82 proposes the introduction of a five-step model for revenue recognition in FRS 102. The model will be based on the requirements of IFRS 15 'Revenue from Contracts with Customers', but with simplifications aimed at ensuring the requirements remain cost-effective to apply. Academies can often have diverse sources of funding, including income from charitable grants, donations, and legacies, where funds are given freely. However, not for profit organisations also receive income from contracts which could be impacted by the FRED 82 updates. It is advised that the updated FRS 102 contains sector specific guidance on revenue recognition.
The proposed effective date of the amendments set out in the FRED is 1 January 202, but this is expected to impact on comparative balance sheets for 2024.
In July 2022 the supreme court issued its judgement on the issue of statutory holiday pay entitlement for employees who are employed from year to year but are contractually only required to work at certain periods in the year. In summary, the case related to a music teacher who worked part time claimed that there had been an underpayment of their wages as their holiday had always been calculated using a percentage method (where holiday pay is worked out as 12.07% of the individuals pay prorated based on their working hours in the prior 12 weeks).
The court ruled that this calculation does not comply with the Working Time Regulations 1999. All part year workers are therefore entitled to 5.6 weeks of holiday regardless of their working hours. This means that academies need to review existing arrangements and rectify any underpayments. They may also wish to review contracts and may even question choosing to employ people on a part time basis in the future, instead option for fixed term contracts. There could be large liabilities to recognise.
The ICAEW academy update in Summer 2023 generated interesting discussion around this topic. There are between 320,000 and 500,000 permanent term time and zero hours workers and between 80,000 and 200,000 agency workers which would be affected. It also means that part time workers will have disproportionately more holiday, and those who work for more than one organisation will have holiday allowance for each employer.
A government consultation took place earlier this year – the government wants to ensure that holiday is proportionate to hours worked. They consulted to change calculation of holiday entitlement for part year and irregular hours workers, and the proposed calculation considered all time worked in the prior 52-week period. This consultation is now closed, awaiting an outcome.
There is also an ongoing backdated pay case ongoing between the police service of Northern Ireland and its staff which may be worth as much as £30m. The case was heard in December 2022 and the judgement is awaited, but it is expected to set a precedent for holiday pay rectification going forward.
This is an important area for academy trusts and may have wide-reaching impacts on the sector.
There remains some uncertainty in the sector, most notably around pension asset recognition and holiday accruals. The landscape ahead appears to be more positive, following the pandemic era, though additional guidance and support from the regulator is likely to be required from a financial reporting perspective.