Much has been reported in the press of late regarding the financial challenges that Academy Trusts are currently facing. The challenge, in a nutshell, is that funding is failing to keep pace with cost increases – most significantly in relation to payroll costs. 8 of the 13 largest Multi-Academy Trusts (‘MATs’) in the country have issued warnings that funding is not sufficient to meet expenditure pressures and 39 Academy Trusts are currently operating under a ‘financial notice to improve.’
As a result, more and more Academy Trusts have been reliant on emergency hand outs from the tax payer. In an acknowledgement of this crisis, the government have requested that from July 2018 budget forecast returns be submitted for the next 3 years instead of the customary 1 year so that they can assess and monitor the financial viability of the sector.
In terms of approving the financial statements, the question ‘is your Academy Trust a going concern?’ is a very relevant and important consideration for the upcoming 2018 year end.
What does ‘going concern’ mean?
‘Going concern’ is a concept relevant to the preparation of the financial statements. The concept specifically looks to the future and considers whether an entity can reasonably be expected to continue in its operational existence for a period of at least 12 months from the date of signing the financial statements. Technically, this is defined as whether an entity is reasonably expected to be able to pay its debts as and when they fall due.
Who forms the view on going concern?
There is a common misconception that the auditor concludes whether an entity is a going concern or not. In fact, it is the directors/governors responsibility to reach a conclusion on this concept – as outlined in the ‘Statement of Governors’ Responsibilities.’ The auditor opines on the conclusion reached and providing they are in agreement, the audit opinion will be unqualified.
How do you form a view on going concern?
Concluding on going concern is a judgement call that involves making assumptions over future incomes/pupil numbers and costs. The conclusion can be reached from the following:
- Reviewing future financial forecasts for at least the next 3 years and assessing the robustness of these forecasts (possibly from past experience);
- Understanding significant changes from current performance/position to future forecasts – are these changes likely? Are the quantified changes accurate?
- What are the key assumptions? How sensitive are these assumptions? (Including reviewing future demographics and expected pupil numbers).
- Reviewing cash flow forecasts. It should be remembered that having enough cash is actually more important to financial health than making future surpluses – though they do ordinarily go hand in hand
- Reviewing the reserves position – can future anticipated shortfalls be absorbed by carried forward reserves?
In practise, governors delegate much of the above work to the Trust business manager or equivalent. But given their personal responsibility in this area, it is very important that they review and understand the results of this work. Where problems are forecast, governors should be proactive in directing work to find solutions – which could include looking for cost savings and/or better ‘value for money’, diversifying incomes, increasing pupil recruitment and/or possibly working in collaboration with other schools.
How are conclusions on going concern presented in the accounts?
Providing an organisation reasonably expects to be able to pay all of its debts as and when they fall due for a period of at least 12 months from the date of signing the financial statements, the accounts are prepared on the ‘going concern’ basis. This means that no specific disclosures will be required. It may be the case that the view on going concern is a difficult one to call – for example, going concern may be contingent on factors, events or conditions outside the control of the organisation i.e. government support, pupil recruitment, DfE decisions etc.
In such a scenario, the governors need to clearly explain the existence and nature of the uncertainty in the financial statements through the ‘going concern’ sections of the Governors’ Report and the accounting policies. The narrative in each area should also explain governors’ plans for dealing with the issue together with their reasoned conclusions for continuing to apply the going concern basis of preparation. Providing the auditor concurs with this commentary, the audit opinion will be unqualified but will draw attention to the disclosures made.
Alternatively, if an organisation does not expect to be able to continue in an operational capacity – for example because there is no alternative but to close or because the academy will join a MAT, the accounts will be prepared on a basis other than going concern, (formerly referred to as a ‘break up basis ’). As well as including different narrative disclosures, the amounts in the accounts will need to be included at ‘recoverable amounts’, (amounts expected to be actually received or paid at short notice), which may be different from current carrying values. It’s likely that all assets and liabilities will also become ‘current’ items.
Early consideration is the key
As the sector endures a challenging time, it is very important to be forward thinking to identify and address issues as they are spotted. This includes early consideration of the Trust’s financial viability/going concern and how that manifests itself through the financial statements. Early consideration of this matter enables auditors to review the adequacy of your approach and to provide proactive support in developing disclosures specific to your Trust’s circumstances. We are here to help and if there is anything that you would like to discuss or require further clarification on, please do get in touch with our expert Academy Accounting team.