College Accounts Direction Handbook 2018/19Effective for all colleges’ financial statements for periods ending on 31 July 2019

SummaryThe College Accounts Direction Handbook (the Handbook) is an updated version of the document commissioned by the AoC in partnership with the College Finance Directors Group (CFDG) in 2017. The Handbook provides advice for Colleges and their auditors on the way in which they can complete their 2018/9 financial statements. This version is a limited update of last year’s handbook.

The Handbook provides advice on the implementation of the accounting policies set out in:

the 2015 Statement of Recommended Practice: Accounting for Further and Higher Education (the 2015 FE HE SORP) which interprets the FRS102 accounting standard.

the College Accounts Direction for 2018-19 issued by the Education and Skills Funding Agency (ESFA).

The purpose of the Handbook is to offer advice on these requirements and includes a model set of financial statements (Casterbridge College) to illustrate the presentation and disclosures that might be found for a typical College.

The Handbook is not mandatory but is designed to assist College financial professionals, auditors and reporting accountants with their work.

Extracts from this publication may be reproduced for non-commercial educational or training purposes, on condition that the source is acknowledged and its contents are not misrepresented.

This is an updated version of the handbook issued on 5 July 2019 and contains some small changes to paragraphs 53 and 57 (covering senior staff remuneration) and some new paragraphs 112 to 113 (covering McCloud provisions).

Association of Colleges12 August 2019

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ContentsAccounting standards, directions and guidance 4

Senior staff pay 14

Assets 18

Leases and service concessions 20

Government grants 24

Additional line items 27

Reserves 28

Employee benefits

Mergers

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32

Joint ventures 38

Related parties 40

Other Accounting issues 41

Appendix – changes in 2019 SORP 43

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Accounting standards, directions and guidance1. The purpose of this Handbook is to provide guidance on the

preparation of Colleges’ financial statements for the year ending 31 July 2019. This Handbook supplements two key accounting documents for colleges: FE HE SORP 2015 – the Statement of Recommended Practice:

Accounting (SORP) for Further and Higher Education franked by the Financial Reporting Council (FRC).

College Accounts Direction 2018 to 2019 issued by the ESFA2. This handbook is aimed at colleges in England, regardless of size,

constitution or complexity, where those colleges are constituted as further education or sixth form college corporations under the 1992 Further and Higher Education Act. The handbook is not aimed at private, charitable or public training providers in receipt of ESFA funding. ESFA requires Sixth Form Colleges that convert to become 16-19 academies to follow the Academies Accounts Direction and the Charities SORP.

3. Accounting policies need not be applied to immaterial items. 4. The Colleges Accounts Direction requires all Colleges to make their

audited accounts for 2018-9 available on their websites by 31 January 2020 with at least two years of accounts being so presented.

5. Colleges with queries on how to apply this guidance to the particular circumstances of their own College should consult their professional advisors, the ESFA or the College Finance Directors Group (CFDG)1.

FRS102 6. The Financial Reporting Council (FRC) has the responsibility in the

UK for financial reporting. It publishes accounting standards and its overriding objective in this area is to “enable users of accounts to receive high-quality understandable financial reporting proportionate to the size and complexity of the entity and users’ information needs2”.

7. FRC published FRS102 in 20153. FRS 102 is “designed to apply to the general purpose financial statements and financial reporting of

1 The Colleges' Finance Directors' Group (CFDG) is the national group for college finance professionals. It represents their interests to Government and others, supports their professional interests and meets in regional groups organised by AoC. Finance directors and other finance staff in colleges can also join the college FINDIRECTORs JISCMAIL (e.mail group) made available by JISC2 FRS102 standard, Page 9

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entities including those that are not constituted as companies and those that are not profit-oriented. General purpose financial statements are intended to focus on the common information needs of a wide range of users; shareholders, lenders, other creditors, employees and members of the public4” .

8. FRS 102 is arranged into 35 sections with the 2015 FE HE SORP broadly following the same order. The sections range from Section 1, the Scope of the standard, through sections on the concepts and the various primary statements, to sections on specific topics.

9. The FRC published an updated FRS102 standard in 2018 which includes modest changes and applies to accounting periods starting on or after 1 January 2019 (i.e. the 2019-20 academic year).

10. Statements of Recommended Practice ("SORPs") are developed in the public interest and set out current best accounting practice. SORPS, issued by ‘SORP-making bodies’ are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique within specialised industries or sectors. 

11. FRC’s FRS100 standard clarifies which accounting standard applies in which circumstances. FRS100 states that “If an entity’s financial statements are prepared in accordance with FRS 102, SORPs will apply in the circumstances set out in those SORPs5”

12. The FRC has approved eight SORPs covering charities, social housing providers, pension schemes, authorised trusts, limited liability partnerships and further and higher education.

13. Colleges are statutory corporations (not companies) and have a charitable purpose (though are exempt from registration). They are therefore required to apply FRS102 in preparing their financial statements. In applying FRS102, colleges must comply with the further and higher education SORP as set out in ESFA’s college accounts direction.

FE HE SORP

14. The further and higher education SORP (the 2015 FE HE SORP) was updated in the early 2010s to reflect the new requirements of FRS102.

15. The FE HE SORP board is convened by Universities UK and comprises university and college associations plus government representatives covering all parts of the UK, including AoC.

3 https://www.frc.org.uk/accountants/accounting-and-reporting-policy/uk-accounting-standards/standards-in-issue/latest-editions-frs-100,-101,-1024 FRS102 standard, Page 105 FRS100 standard, Page 9

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16. The 2015 FE HE SORP is intended to: improve the quality of financial reporting by institutions; enhance the relevance and comparability of, and the ability to

understand the information presented in institution’s financial statements;

provide clarification, explanation and interpretation of accounting standards and their application to sector specific transactions; and

assist those who are responsible for the preparation of the financial statements.

17. FRC has approved a new 2019 FE HE SORP to take effect at the same time as the new FRS102 (accounting periods starting on or after 1 January 2019). Early adoption by colleges is permitted providing all amendments are applied at the same time.. This version of the handbook provides no advice on the new standards, (as this will be included in the accounts direction handbook 2019 to 2020).

College accounts direction18. The Secretary for State for Education is the charitable regulator of

colleges and assigns this work to the Education and Skills Funding Agency (ESFA), which also provides funding to colleges.

19. ESFA’s annual College Accounts Direction6 sets out financial reporting requirements for further education and sixth form college corporations. Compliance with the accounts direction is a requirement in ESFA’s condition of funding agreement for colleges.

20. The specific requirements of the college accounts direction are set out in four annexes and say that colleges must: present a statement of corporate governance and internal

control explaining which one of three codes the college complies with. 70% of colleges in 2017-18 reported that they complied with AoC’s Code of Good Governance for English Colleges. Almost all of the remaining colleges stated that they had regard for the UK Corporate Governance Code.

present a statement of regularity, propriety and compliance (Annex B).

present a statement of the responsibilities of the members of the corporation (Annex C).

make a number of additional disclosures ranging from their public benefit to information on senior staff pay (Annex D)

6 The College Accounts Direction 2018 to 2019 is available on AOC’s website at https://www.aoc.co.uk/funding-and-corporate-services/funding-and-finance/accounting-and-financial-planning and on GOV.UK at https://www.gov.uk/government/publications/college-accounts-direction

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21. More than 175 colleges (a majority) have applied to join the Office for Students (OfS) register so that they can continue to offer publicly supported higher education. OfS has registered most of the colleges who have applied and has financial reporting requirements, which effect in the 2019-20 academic year (i.e. after 1 August 2019). These requirements do not apply to colleges in 2018-9 but OfS registered colleges should be mindful of OfS’s requirements in terms of governance and financial sustainability when preparing their 2018-9 accounts. ESFA staff are working with OfS to align requirements for 2019-20 but, for 2018-19, only ESFA’s college accounts direction applies.

Model accounts (“Casterbridge College”)22. The accounting standards, recommendations and directions listed

above require colleges to prepare four primary statements are to be presented: Statement of Comprehensive Income [and Expenditure] (SOCI); Statement of Changes in Reserves; Statement of Financial Position (Balance Sheet); and Statement of Cash Flows

23. AoC has updated the Casterbridge College model for 2018-19 financial statements. The model was originally developed twenty years ago and updated annually since then.

24. The Casterbridge College model is provided to help colleges with their financial statements but Casterbridge College is fictional. Any resemblance to an actual college, its staff or advisors is coincidental.

25. The model statements show how an FE or sixth form college with fairly standard activities could apply the 2015 FE HE SORP and the College Accounts Direction. The 2018-9 version does not cover all eventualities and does not show how to implement the charity governance code, government capital grant accounting under the performance model, intangible fixed assets, investment properties or joint venture arrangements.

26. Where a college or its subsidiary is constituted as a company, the financial statements must also be properly prepared in accordance with the relevant provisions of the Companies Act, including the presentation of a Strategic Report.

27. FRS 102 permits presentation of additional line items, headings and sub totals when such presentation is relevant to the understanding of an entity’s financial performance. This features within the 2015 FE HE SORP in that presentation format. FRS 102 does not use the term “exceptional” though but if an item is of such importance to

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the user’s understanding of the financial statements then it must be presented separately (2015 FE HE SORP para 3.6).

28. Paragraph 3.7 of the 2015 FE HE SORP states “The disclosure of material items must be made either in the notes or by the insertion of an additional line within the relevant activity heading on the face of the Statement of Comprehensive Income. This is expanded upon further in Chapter 3.

Strategic report & ESFA mandated statements Strategic report29. Colleges should prepare a report which covers their own plans and

circumstances. The FEHE SORP sections 3.19 to 3.22 says that the strategic report should cover: The college’s objectives and its strategy for achieving these

objectives The college’s development and performance through the year

and year end position The college’s future prospects A description of the principal risks and uncertainties Key performance indicators

30. The Strategic Report replaced the Operating and Financial Review in College financial statements, though it does not have to be named as such. Alternatives could include Members’ Report, Report of the Governing Body or Trustees Annual Report for example, but the content should still include, as a minimum, the items set out in the 2015 FE HE SORP, as well as any additional items required by ESFA, ie legal status, public benefit and plans for future periods and reserves policy.

31. The form of this report is not prescribed but Colleges that are also companies will need to consider the need to sign off a separate Strategic Report and should consult their professional advisers on the implications for the format of their financial statements.

32. The illustrative text in Casterbridge College should be tailored to the specific position of the College. Demonstrating effective governance to stakeholders has never been more important, and colleges should avoid applying a ‘boilerplate’ approach to preparing their accounts through over-reliance on Casterbridge.

Legal status

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33. The following statement provides a model for how a college could meet the ESFA requirement that is discloses its legal status. It might be helpful to include information here about recent corporate changes (for example mergers or name changes) and any subsidiary companies

------------------------------------The Corporation was established under the Further and Higher Education Act 1992 for the purpose of conducting Casterbridge College. The College is an exempt charity for the purposes of Part 3 of the Charities Act 2011.

Public benefit34. The following statement provides a model for how a college could

meet the ESFA requirement that is has had due regard for the Charity Commission guidance and delivered its charitable purposes for public benefit.____________________________________________In setting and reviewing the College’s strategic objectives, the Governing Body has had due regard for the Charity Commission’s guidance charitable purposes and public benefit

In delivering its mission, the College provides the following identifiable public benefits through the advancement of education:

High-quality teaching Widening participation and tackling social exclusion Excellent employment record for students Strong student support systems Links with employers, industry and commerce

_________________________________________________________35. Colleges should tailor the statement according to their own

circumstances.

Plans for future periods/reserves policy

36. ESFA requires colleges to set out in plans for student recruitment, cost saving and efficiencies, while discouraging ’boilerplate’ statements. This is linked to a requirement that colleges set out their reserves policies.

37. The strategic report explained earlier should be a key element in complying with this requirement.

Governance statement

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38. ESFA requires colleges to “include a statement of corporate governance and internal control within their accounts”. This statement must include:

A declaration of compliance with either the college, charity or corporate governance code or, if not adopted, a statement that the corporation has had due regard to principles (precise wording is in Annex 1).

Details of members of the corporation and their record of attendance

Information on the governance framework, on risk management, on internal control weaknesses, on action to deal with these and on the corporation’s performance

An assessment of whether the corporation is a going concern39. ESFA expresses a preference that charitable college corporations

adopt a governance code that comprehensively reflects their legal structure, operations and stakeholders”. Most colleges have adopted AoC’s Code of Good Governance for English Colleges (“the College Code”)7. The College Code is intended to help governing boards meet and exceed basic governance requirements.  AoC developed the Code in response to a government request, with the help of government funding and in full consultation with a wide range of college stakeholders including governors, clerks, trade unions, NUS and other interested parties.

40. The following statement provides a model for how a college could meet ESFA’s Annex A requirements:----------------------------------------------------------------------------------------------

Statement of Corporate Governance and Internal Control

The following statement is provided to enable readers of the annual report and accounts of the College to obtain a better understanding of its governance and legal structure. This statement covers the period from 1st August 2018 to 31st July 2019 and up to the date of approval of the annual report and financial statements.

The College conducts its business:

i. in accordance with the seven principles identified by the Committee on Standards in Public Life (selflessness, integrity, objectivity, accountability, openness, honesty and leadership); [and]

7 https://www.aoc.co.uk/funding-and-corporate-services/governance/governance-resources/code-good-governance-english-colleges

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ii. [in full accordance with the guidance to Colleges from the Association of Colleges in The Code of Good Governance for English Colleges (“the Code”) which it adopted on (insert date]

The College is committed to exhibiting best practice in all aspects of corporate governance and in particular the College has adopted and complied with the Code. The Governing Body recognises that, as a body entrusted with both public and private funds, it has a particular duty to observe the highest standards of corporate governance at all times. In carrying out its responsibilities,

41. Colleges should tailor the statement according to their own circumstances.

Statement of regularity, propriety and compliance

42. ESFA’s College Accounts Direction sets out a form of words for the statement of regularity, propriety and compliance in Annex B. The statement must be signed by the chair of governors and the accounting officer on behalf of the corporation. ESFA provides further guidance on this statement in its Post 16 Audit Code of Practice (Post 16 ACOP) and available at https://www.gov.uk/government/publications/post-16-audit-code-of-practice. Key points are that:

any references in the final signed statement to instances of material irregularity, impropriety or funding non-compliance are consistent with any findings from the work of the reporting accountant.

to form their conclusion the corporation must ensure that it is working within the boundaries of regularity and propriety. This work should be performed throughout the year, as part of their oversight of internal control processes (the code provides a number of examples of documents and tests).

The corporation can also draw comfort from the work of the audit committee and internal auditor (if applicable) which provides a process for independent checking of internal control processes.

It is for the corporation to determine if further work is necessary at year-end to evidence their statement of regularity, propriety and compliance. If proper internal control processes have operated during the year, there should be no need for significant additional scrutiny.

ESFA’s regularity self-assessment questionnaire (RSAQ) acts as a checklist for these requirements. Corporations must provide a copy of their completed RSAQ to the reporting accountant, signed by the accounting officer and chair of governors.

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Gender pay gap reporting 43. Colleges are required to publish the following information on gender

pay gaps on their own website and on a government website8: Gender pay gap (mean and median averages) Gender bonus gap (mean and median averages) Proportion of men and women receiving bonuses Proportion of men and women in each quartile of the

organisation’s pay structure

44. Colleges may want to consider whether this information would also usefully be included within their own Members/Strategic Reports. This would not remove the requirement to separately publish the results on the College website or the Government website.

8 The Gender Pay Gap reporting rules apply to all organisations with more than 250 employees but also to all public service bodies. Colleges are defined as public service bodies

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Senior staff payKey management personnel45. Paragraph 25.8 of the 2015 FE HE SORP defines key management

personnel using the definition in FRS 102 paragraph 33.6 as “those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity”.

46. Colleges should decide which staff are captured by the definition above and for clarity, disclose the information in the financial statements. A listing of senior postholders or the senior management team is not enough for this purpose.

47. Casterbridge College example accounts include a skeleton disclosure in the schedule of Key Management Personnel, Board of Governors and Professional Advisers.

48. Compensation is defined in FRS 102 paragraph 28.4 and includes all employee benefits, all forms of consideration paid, payable or provided by the institution or on its behalf in exchange for services to the institution. Institutions are required to disclose this information at an aggregate level, not an individual level. The disclosure should be reported gross of any salary sacrifice arrangements.

49. Based on the definition of employee benefits within Section 28 of FRS 102, the total of key management compensation would include the following, where applicable:

Pay social security costs such as employer's national insurance

contributions; paid annual leave and paid sick leave; termination benefits; profit sharing arrangements and bonuses; non-monetary benefits (such as medical care, housing, cars

and free or subsidised goods/services); post-retirement benefits including employer's pension costs; long term benefits such as long term paid absences

50. The difference here to the disclosure requirements under previous UK GAAP is the inclusion of Employers’ National Insurance in the aggregate figure. The College Accounts Direction excludes employer’s national insurance in the bandings table.

Pay bands

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51. The Accounts Direction requires colleges to disclose the number of key management personnel (in bands of £5,000 starting at nil) and of higher paid staff (in bands of £5,000 starting at £60,000) in pay bands. The banding disclosures are intended to capture “head count” numbers, in the appropriate banding for the full year emoluments. Colleges may therefore need to include additional narrative in the notes where there are numbers of staff who left and/or joined in the year.

52. The disclosures on pay also extend to previous key management personnel that are continuing to receive emoluments in an employed, advisory or consultancy role.

53. The definitions for emoluments are set out in paragraph iv (e). Errors in this analysis in the past have included omitting salaries of interim leaders paid via agencies or including employers’ national insurance.

54. An additional disclosure, which derives from the requirements in the 2015 FE HE SORP paragraph 25.8, is in respect of salary sacrifice arrangements. These are required to be grossed up for relevant disclosures and the Direction then goes on to require Colleges to describe any such arrangements in place. A formal statement that there are no such arrangements in place is required if applicable

Pay transparency55. ESFA has increased disclosure requirements around executive pay,

to explain and justify, in a short paragraph for each individual, the total emoluments of each member of the key management team, in terms of value and performance delivered. It is not necessary to disclose the names of the individuals, other than the accounting officer, if this risks breaching data protection.

Pay multiples56. Drawing from OfS’s accounts direction, ESFA has also introduced the

concept of pay multiples, namely the relationship between the accounting officer’s emoluments divided by the median pay of all other college employees, expressed in two ways (basic salary and total emoluments).

57. ESFA recognises the challenge this may present to colleges in drawing together the necessary evidence, but states that colleges must provide the data. It would be good practice to provide prior year comparatives. ESFA should apply Ofs’s guidance9 as required.

Compensation for loss of office

9 https://www.officeforstudents.org.uk/media/10a31872-8ebc-4e09-8760-fb24806a3160/accounts-direction-faqs.pdf

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58. Paragraphs v and vi of Annex D of the College Accounts Direction 2018 to 2019 set out the disclosure requirements for compensation for loss of office. These are unchanged from previous years and as before, Colleges should consider both these and the Key Management Personnel remuneration disclosures in the context of the annualised rate of pay applicable to those staff i.e. the decision as to whether or not to include them and in which band should be judged against their full year equivalent remuneration.

59. Colleges are also required to disclose the amount of severance costs for each year split between contractual and non-contractual payments and to disclose whether the costs were approved by the Corporation or a committee established by the Corporation for this purpose.

60. Non-contractual severance payments are paid to employees outside of normal statutory or contractual requirements when leaving employment whether they resign, are dismissed or reach an agreed termination of contract.

61. Colleges are reminded that there are specific tests in the Regularity Framework concerning severance payments including demonstrating that payments in respect of termination are regular and secure value for money and avoid spending funds on settlements where disciplinary action would have been more appropriate.

62. The Corporation should be able to demonstrate these matters through advice received, minutes of consideration and notification to the reporting accountant.

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AssetsProperty, Plant and Equipment (Fixed assets) accounting

63. Property, Plant and Equipment (“PPE”) is the term used in Section 17 of FRS102 for the category previously referred to as Fixed Assets. The 2015 FE HE SORP uses the term “Tangible Fixed Assets”. PPE are tangible assets held for use in the College and are expected to be used during more than one period. They will include Investment property, where such property’s fair value cannot be measured reliably or without undue cost and effort (though unlikely in practice for most Colleges).

64. In terms of values, the requirement of FRS102 is that revaluations must be “sufficiently regular” so that the carrying value of an asset at the reporting date is not materially different from its fair value. This implies an annual formal consideration of the carrying values. The expectation of both the 2015 FE HE SORP and FRS 102 is that the full valuation (carried out regularly) would be carried out by professionally qualified valuers with the date, use of the valuer, main assumptions and original cost equivalent being disclosed in the same way as before.

Intangible Assets and Goodwill 65. Intangible Assets and Goodwill are covered in Section 18 and 19 of

FRS 102 but are not covered this Handbook as they have been deemed to be of interest only to a relatively few Colleges. Colleges should consult with their professional advisers if they believe they have these assets.

Land and buildings owned by third parties

66. A number of Colleges, in particular Sixth Form Colleges, occupy premises where the freehold or leasehold is owned by a third party such as a Diocese or related trust. Some of these arrangements are informal, or at best governed by a licence to occupy, with no rental payable. Many of these arrangements do in turn have a requirement laid upon the College to maintain the premises to an agreed standard. The key issue arising here is whether the College should recognise a fixed asset on its balance sheet.

67. FRS 102 defines an asset as ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow’. For Colleges this will mean: Future economic benefits are expected to flow to the College

as it will avoid the cost that it would otherwise have incurred in

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obtaining premises and it intends to continue to occupy the property for the foreseeable future

A past event may have arisen in the form of the signing of an agreement permitting continued occupancy of the premises or the past occupation of those premises

Control means the ability to determine who is, and who is not, able to use the asset and therefore obtain economic benefits from it. Issues that a College will need to consider include:

o Control over accesso Control over works including capital works

68. If the College cannot conclude that it has control over the property then the premises would not meet the definition of a fixed asset. This will need to be considered carefully on a case-by-case basis, reviewing the distribution of risks and rewards in respect of the right to use the property from the arrangements between the College and the other party. Regardless of the conclusions reached, the financial statements should disclose the accounting policies and the facts that led to the conclusions under the heading of “Judgements in applying accounting policies”.

69. The 2007 SORP used to contain guidance that caused a number of colleges to record trust property in their accounts for the first time on the basis that they had use of the asset with a corresponding deferred capital grants. The concept of deferred capital grants no longer exists. Colleges who decide that their use of the trust property meets the FRS102 test should record the corresponding credit as deferred income, split between amounts falling due within one and in more than one year.

Investment Property

70. Investment property is dealt with in section 16 of FRS 102 and Section 10 of the 2015 FE HE SORP. Paragraph 16.2 of FRS 102 provides the definition of Investment Property with paragraph 10.2 of the 2015 FE HE SORP helpfully expanding on the exclusion criteria for educational institutions being for social benefit and therefore not typically classified as investment property. This means that for example, student accommodation should be classified as PPE rather than as an investment property.

71. The distinction is important because investment property should be measured at fair value at the end of each reporting period, and any changes in fair value should be recognised immediately in the Statement of Comprehensive Income. This will mean there could be volatility in reported results as a result of the valuation movements.

72. The consideration as to whether a property meets the definition of an investment property should be made at the individual entity level as well as at the consolidated level. This could mean there are

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differences in the way the same property is accounted for between the individual entity level accounts and the consolidated accounts.

73. Similarly, “mixed use” property – where for example, the ground floor is leased out for retail units and the upper floors are employed for educational use – will need to be split out and accounted for separately, subject to the ability to reliably measure the fair value of these without undue cost and effort. Colleges should keep their property holdings under review and consider the need to reclassify assets according the definitions in the FRS and the 2015 FE HE SORP. The “mixed use” change is likely to generate differences in accounting treatment compared to the previous UK GAAP but also the existence of property leases between group members such as subsidiary companies of the College.

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Leases and service concessions74. The accounting for leases is found in section 20 of FRS 102 and

section 14 of the 2015 FE HE SORP. The basic understanding of lease accounting under the current version of FRS 102 is in many ways similar to previous UK GAAP but with some important distinctions.

Finance and operating leases75. A lease is classified at inception as a finance lease if it transfers

substantially all of the risk and rewards incidental to ownership. All other leases are classified, at inception, as operating leases.

76. Examples of situations that individually or in combination would normally result in a classification as a finance lease include: The lease transfers ownership of the asset to the lessee by the

end of the lease or the lessee has the option to acquire the asset at a price significantly lower than fair value;

The lease term is for the major part of the economic life of the asset even if title has not been transferred;

At the inception of the lease the present value of the minimum lease payments amount to at least substantially all of the fair value of the leased asset;

Lease assets are of such a specialised nature that only the lessee could use them without major modifications; and/or

The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

77. The phrase “substantially all” points to one of the key differences between the previous UK GAAP and FRS 102. Under the previous UK GAAP a key test of the transfer of the risks and rewards of ownership was the “90% test” – did the Net Present Value of the minimum lease payments under the lease equal or exceed 90% of the fair value of the asset. This led to a substantial number of leases being written to fall just under the 90% limit to qualify as operating leases.

Arrangements that contain a lease 78. FRS 102 contains guidance derived from full IFRS on whether certain

arrangements, although not in the legal form of a lease, nonetheless convey the rights to use of an asset in return for payments in the same way as a lease. For affected Colleges, IFRIC 4 elaborates on the factors to consider. Typically, they may be found in some outsourcing arrangements. The payments made and the length of the contract mean that assets used to service a contract by a supplier are to all intents and purposes transferred to the customer as if they were leased, only as part of a much wider service

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contract. In such circumstances it might be necessary for lease liabilities and leased assets to be recognised on inception of the arrangement, with judgement needed to be applied to determine how much of the overall contract payment is in substance lease payments.

79. Types of arrangements this may affect are catering and IT contracts whereby the contract price covers the cost of specific equipment installed by a third-party supplier to provide the contracted services.

Lease incentives80. FRS 102 requires lease incentives to be spread over the lease term,

for those leases signed after the transition balance sheet date (1 August 2014 for Colleges).

Disclosures81. For lessees, FRS 102 requires the total future minimum lease

commitments to be disclosed, analysed in time frames of not later than one year, between one year and five years, and later than five years. By contrast, the previous UK GAAP required disclosure of the annual lease commitment, analysed by when the payments fall due. In this respect, FRS 102 provides information on the total off-balance sheet finance obtained through operating leases as opposed to the approach in the previous UK GAAP of focussing on the future annual expense and cash outflow.

82. Colleges will need to assess whether they have arrangements that contain a lease, whether they have the lease documentation to classify the leases appropriately and whether they have the information to generate the required disclosures. It is unlikely that the simple answer will be “it is not material” and therefore Colleges will need to at least have completed some reviews of significant leases and those contracts in areas where there is more likelihood of lease arrangements.

Service concessions

83. FRS 102 (section 34.12) defines a service concession arrangement as an arrangement where a public sector body or public benefit entity (the “grantor”) contracts with a private sector entity (the “operator”) to construct (or upgrade), operate and maintain infrastructure assets for a specific period of time.

84. Colleges may find themselves in this situation if, say, they enter into arrangements with other parties to refurbish, build, or take over student accommodation at some point in the future in return for payments or guaranteeing liabilities of the operator. The 2015 FE HE

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SORP clarifies that student accommodation is an infrastructure asset.

85. Under the previous UK GAAP, there was guidance on such contracts in FRS 5: Accounting for the substance of transactions. The key consideration under FRS 5 was whether an operator had assets (e.g. a property) used to provide the contracted services, or alternatively a debtor, being the right to receive payments for the contracted services (in which case the property was an asset of the grantor).

86. Which of the two contracting parties should have been recognising the asset and related liability was driven by an assessment of who was exposed to the associated risks and rewards of that asset. This led to a number of contractual arrangements being set up that were specifically designed to keep the underlying asset off the balance sheet of the College by adjusting the perceived balance of those risks and rewards.

87. The FRS 102 definition has two specific conditions attaching to it to assist in identifying the possibility of a service concession: The grantor controls or regulates what services the operator

must provide, to whom, and at what price Where the arrangement is for a period less than the useful

economic life of the infrastructure assets, the grantor controls any significant residual interest in the property at the end of the term of the arrangement.

88. Where these two conditions are met, the grantor (the College) rather than the operator will recognise the asset(s) which is (are) the subject of the contract, and a liability for the payments for its obligation under the service concession arrangement, i.e. account for any amounts payable, including any amounts guaranteed as a finance liability.

89. The 2015 FE HE SORP goes on to provide a decision tree to help determine whether an arrangement needs to be accounted for as a service concession arrangement: Is the College acting as principal within the arrangement? Does the arrangement meet the definition of a service

concession arrangement? Does the arrangement pass the control tests set out in FRS 102?

90. Only if all three tests are met will the arrangement be accounted for in accordance with the leasing arrangements in FRS 102 and an asset and liability recognised at the present value of the minimum lease payments. Future lease payments would be allocated between finance charges, lifecycle costs, service costs and repayment of the liability.

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91. This is a complicated area whereby each case needs to be judged on its own facts and circumstances. It is not expected that it will affect the majority of Colleges though each should have already reviewed their contractual arrangements for the possible existence of a service concession as part of the preparation for transition to FRS 102.

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Government Grants92. The biggest change brought in by FRS102 for colleges relates to

government grants. Section 24 of FRS 102 covers this issue and brings in some unfamiliar concepts and a host of new terminology. The final version of FRS 102, and indeed the 2015 FE HE SORP, represents a compromise in moving from the previous UK GAAP baseline of matching income and expenditure to the IFRS-based equivalents.

93. In broad terms, the accounting for the three main types of income will be as follows: Revenue accounting (“exchange transactions”) – accrual model

(essentially no changes to previous UK GAAP) Government grants, capital and/or revenue– accrual or

performance model Non-exchange transactions – performance model only

94. The accruals concept was key to the previous UK GAAP but is less obvious in FRS 102 which, as noted, has its roots in IFRS.

95. A government grant is assistance by government in the form of a transfer of resources normally for past or future compliance with specified conditions relating to operating activities. Grants are accounted for under one of two models with the chosen model applied to all grants as an accounting policy choice: the “performance model”, whereby grants are recognised in

income when there are no specified future performance conditions or when any specified future performance conditions have been met. Grants received before the revenue recognition criteria are satisfied are recognised as a liability, i.e. within deferred income.

the “accrual model”, which requires the grant to be classified as either relating to revenue expenditure or asset expenditure. Grants relating to revenue expenditure are recognised in income “on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate”. Grants relating to assets are recognised on a systematic basis over the expected useful life of the asset. The accrual model therefore matches the recognition of the grant in the income statement with the related expenditure. Where income on a grant related to an asset is deferred it shall be recognised as deferred income and not deducted from the carrying amount of the asset (as before except that previously the deferred income was called a deferred capital grant and included in a separate balance sheet category).

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96. Colleges can choose one approach for capital government grants and one approach for revenue government grants (except for government grants for land in which case they have to use the performance model). The complication of the accounting policy choices available will be most obvious where a College has a grant for the acquisition and/or construction of a building on land it does not already own, in which case the grant would need to be allocated between the separable elements. This could become even more complicated if the grant in question is jointly funded by both a government and a non-government body.

97. Grants that do not meet the definition of a government grant must be accounted for as a non-exchange transaction in accordance with section 23 of FRS 102, which only permits use of the performance model. Government grants will come from obvious sources such as the ESFA, OfS and local authorities but as the full extent of what could be defined as “government” is not explicitly set out in either FRS 102 or the 2015 FE HE SORP (though the latter does give some high level examples in paragraph 17.2), Colleges should consider carefully the origins of funding received from external parties. The 2015 FE HE SORP goes on to note in paragraph 17.3 that where the external party receives a significant portion of its funding from a non-government source then it would be considered a non-government entity – the reverse of this is obviously true as well and might encompass a charity providing funding to a College but whose own funding in turn is largely derived from government (essentially a conduit funder from government in the same way that Colleges act as lead for consortium arrangements). Some limited enquiries might be expected from Colleges to ascertain the ultimate funding source of the grants received to satisfy the accounting treatment chosen.

98. Grants, including non-monetary ones, shall not be recognised until there is reasonable assurance that the entity will comply with the conditions attaching to them and the grants will be received.

99. When a grant becomes repayable it shall be recognised as a liability when the repayment meets the definition of a liability.

100. A restriction “is a requirement that limits or directs the purpose for which a resource may be used which does not meet the definition of a performance related condition”. This would typically be an all or nothing approach such as the requirement to build a College classroom.

101. A performance related condition” is “a condition that requires the performance of a particular level of service or units of output to be delivered, with payment of, or entitlement to, the resources conditional on that performance”. This will not include milestones or administrative tasks such as submitting a grant claim.

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Additional line items102. The concept of “exceptional items” no longer exists in UK GAAP, as

such the term should not be used in the primary statements. 103. FRS 102 permits presentation of additional line items, headings and

sub totals when such presentation is relevant to the understanding of an entity’s financial performance. This features within the 2015 FE HE SORP in that presentation format through the reference to “Fundamental” restructuring costs adjacent to the staff costs line (albeit the term “fundamental” should not be used either). FRS 102 does not use the term “exceptional” though but if an item is of such importance to the user’s understanding of the financial statements then it must be presented separately (2015 FE HE SORP para 3.6).

104. Paragraph 3.7 of the 2015 FE HE SORP builds on Section 5.9 of FRS 102 in dealing with another change to previous UK GAAP being the disclosure of what were known as exceptional items and in particular those under FRS3.20 which were shown “below the line”. Paragraph 3.7 states “the disclosure of material items must be made either in the notes or by the insertion of an additional line within the relevant activity heading on the face of the Statement of Comprehensive Income”.

105. The 2015 FE HE SORP includes the separate disclosure of gains and losses on the disposal of fixed assets as another “below the line” item. This is shown below the “Surplus/ (Deficit) before other gains losses” line and alongside losses and gains on investments. This is intended only to be used for items that are clearly unusual. FRS 102 states at paragraph 5.9B that activities that would normally be regarded as “operating” should be included in arriving at the results from operating activities. In this regard, the “normal” turnover of fixed assets such as the disposal of IT equipment would be part of operating activities. Significant disposals of buildings may be open to discussion as to whether they should fall to be treated as operating activities or to be disclosed below the equivalent of the operating surplus line.

106. Regardless of whether the term “Exceptional item” exists within the new UK GAAP, Colleges will find that it affects a number of other areas that will be equally important to them. In addition to the reported results, such items may have an impact on the financial health score as calculated by the ESFA and on bank loan covenant testing, depending on the terminology used: ESFA’s criteria for financial health (set out in its Financial

Planning Handbook) an application for moderation if a college’s underlying financial health is better than the figures in financial statements and plans, for example because there has been a significant recovery of funds following a funding audit or

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investigation; a court ruling; a contingent liability crystallising; delays in asset sales / receipts

Bank loan covenants may still include definitions of “exceptional items” in determining the benchmark results for assessing compliance with the conditions. These will be need to be analysed to see if for example merger related costs can be excluded from such calculations, though often the bank will present some standard items and indicate that other items should be discussed with the relevant manager. Many recent bank loan covenants are actually entirely silent on the issue. As always, such discussions should take place well in advance of the year end so that any relevant waivers can be put in place before the 31st July should they be required.

107. Colleges may wish to give such information more prominence in other ways such as presenting such one-off items on the face of the Statement of Comprehensive Income above the “surplus before other gains and losses” line, where they are material to the understanding of the College’s financial performance, and using a “boxed” presentation as shown below:

2018 2017

Surplus before other gains and losses X X

Analysed as:

Operating surplus before exceptional items X X

[merger related costs/loan breakage costs/etc]

(X) (X)

Operating surplus X X

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ReservesRestricted reserves

108. Paragraph 18.17 of the 2015 FE HE SORP requires the disclosure of brought forward and carried forward restricted reserves and the reconciliation of the two, with reserves being analysed by “materially similar types of restriction”. Whilst a great deal of this accounting is still aimed at endowments and donations, which do not materially affect the majority of Colleges, it does also pick up on for example, government grants with restrictions.

109. The balance sheet is required to analyse reserves between restricted and unrestricted elements and the same analysis is to be provided for the Statement of Comprehensive Income and Statement of Changes in Reserves.

Designated reserves/funds

110. A distinction is required to be drawn here for designated reserves or funds. Paragraph 18.22 of the 2015 FE HE SORP is quite clear that “Such designations are an internal matter for each institution and therefore must not be disclosed in the primary statements”. For the avoidance of doubt, this means that the previous 2007 SORP concept of holding a separate “Pension Reserve” on the face of the balance sheet, is no longer an option as this is just part of the income and expenditure reserve. Colleges may wish to include an analysis of the income and expenditure reserve to separate out the pension reserve element in the notes to the accounts if they wish. They must not do so on the balance sheet as this is a primary statement.

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Employee benefits111. Many of the provisions of section 28 of FRS 102 regarding Employee

benefits will be familiar to Colleges. There are however some key differences to the previous UK GAAP which will be explained here.

112. Employee benefits are split into four categories: Short-term benefits – employee benefits (excluding

termination payments) which are to be settled in full within 12 months of the year-end. These would include:o Wages, salaries and social security benefits;o Paid annual leave (holiday pay) and sick leave (and required

to be presented as a liability due within one year by FRS102.28.6);

o Profit-sharing and bonuses; ando Non-monetary benefits (e.g. company cars) for current

employees.

Post-employment benefits – employee benefits that are payable after the completion of employment (and do not meet the criteria for termination or short-term benefits). Captured here would be the typical pension scheme arrangements found in most Colleges including the TPS and the LGPS.

Termination benefits – employee benefits provided in exchange for the termination of an employee’s employment.

Other long-term employee benefits – employee benefits which do not meet the above criteria for short-term, post-employment or termination.

113. To a large extent, the majority of the presentation and disclosures associated with the above will already be included in most Colleges’ financial statements through their implementation of FRS 17 under the previous UK GAAP. The main differences under FRS 102 are: Holiday pay – FRS 102 requires a provision which can be based

on a number of simplifying assumptions. There does not have to be made on a line by line, employee by employee basis (unless there are electronic records in place which easily facilitate that perhaps). The provision needs to be materially correct and able to stand up to audit scrutiny. Colleges should discuss their methodologies with their professional advisers. Colleges should recalculate the provision at each financial period end, updating the assumptions and base data as required, and considering whether any movements in the provision are material and should be recognised in the Statement of Comprehensive Income.

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Actuarial gains and losses are now recognised in other comprehensive income whereas they were previously recognised in the Statement of Total Recognised Gains and Losses.

Pensions interest cost under defined benefit schemes – Under FRS 102 this is now calculated using the discount rate applied to the opening net pension liability and will generally produce a figure that is higher than previously. Colleges will be provided with the figures required by their scheme actuaries in most cases and will need to consider the impact of the changes on any relevant banking covenants and on key stakeholders.

Agreements to fund multi-employer scheme deficits are now recognised as liabilities for the contributions payable that arise from the agreement (to the extent that they relate to the deficit). Previously this was not specifically addressed and as a result generally not recognised. For most Colleges this will have little practical difference (the main pension scheme deficit being in relation to the LGPS which is accounted for as a defined benefit pension scheme and therefore no further liability is recognised) though, alongside the new requirements to present group plans on at least one balance sheet, if any Colleges do have other pension liabilities such as USS (where an agreement has been entered of how the deficit will be funded), then there may be some additional liability recognition to take into account. The existing accounting for the Teachers’ Pension Scheme did not change as the new rules apply only to funded schemes and the TPS is an unfunded, notional, scheme valuation.

Balance sheet presentation – Under FRS102, Colleges can no longer display a separate pension reserve on the face of the balance sheet. The net Income and Expenditure reserve will be included but without the additional presentation of before and after accounting for the pensions reserve. This will be important for colleges whose net Income and Expenditure reserve is small or even negative once the pension reserve was deducted under the previous UK GAAP and will need explaining to key stakeholders.

Mccloud provisions114. In July 2019, the government has conceded defeat in the court

dispute over public sector pension reform age discrimination. The courts ruled that the transitional provisions discriminated against younger judges and firefighters. There is now a cross-government effort to develop plans to make changes to all public sector schemes (including TPS and LGPS). There will need to be consultation on these changes, court approval and a Parliamentary process to secure the regulations. This could take years to reach completion.

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115. In the meantime, the affected government departments, LGPS funds and councils have all included McCloud provisions in their 2018-9 accounts which have a 31 March year end. DfE's TPS McCloud provision is a very large £7 billion but pales in comparison to the total liability of £360 billion.

116. There are some implications for colleges: there is a good case that colleges should also make McCloud

provisions in 2018-9, though ultimately it is up to each corporation to decide whether to do so. The view of most external audit firms and ESFA is that it is necessary to do so. Universities and academies are in the same position. Failure to do so risks qualification (and ESFA intervention).

there will be lots of guesswork in arriving at this additional figure but it will be recorded as a "current year past service cost" so will reduce the bottom-line surplus (increase the deficit). Collectively we will need to push ESFA, OfS, banks and others to ignore it.

the provision is likely to be required for several years until the issues are finally resolved.

colleges need to ensure that the actuary providing FRS102 figures for their year-end accounts covers this issue as well.

a college that believes it does not need to make a provision would probably need to take actuarial advice to show it wasn't necessary (ie to show that the age of staff is higher than average or that pay rises are typically lower than average).

Mergers117. There have been more than 60 college-to-college mergers since

2015 and more than 20 sixth form college transfers to the academy sector. The experience of this structural change shows that it is worth planning effectively by engaging with ESFA, auditors and other external stakeholders at the earliest opportunity.

118. The most common types of combination since 2015 have been: The assets/liabilities of one or more college transferring to one

existing college (Type B merger). There has not been a Type A merger (a new corporation) since 2012.

A sixth form college converting to a single academy trust, combining to form a new multi academy trust or joining an existing multi academy trust

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119. The nature of the business combination will influence certain accounting, legal and reporting requirements (i.e. dissolution of one or more college corporations; academy accounting rules to be applied etc.).

Planning120. Responsibility of producing, signing and delivering the dissolving

college’s financial statements rests with the chair and accounting officer of the receiving entity10. As part of the planning phase, both the dissolving college and receiving entity should agree between themselves access to evidence in order for the receiving entity to be able to fulfil its responsibilities. In doing so, the receiving entity is should undertake due diligence to provide them with assurance that they have access to all necessary evidence to sign the dissolving college’s financial statements. Once the parties have agreed what needs to be provided to the receiving entity, the dissolving college must make available all relevant supporting documentation during the handover process. Colleges should ensure regularity is given due regard during this process in order to support the college’s statement on regularity, propriety and compliance, which the chair and accounting officer of the receiving entity are responsible for signing.

121. Ahead of the merger or conversion, the college corporation must engage with ESFA’s territorial team to establish which (if any) reporting exemptions will apply. This will inform reporting deadlines and content for the colleges corporations both prior to and after any business combination.

122. If the dissolving college is considering extending its final period accounts, it should discuss this with their auditor, ensure that this is permitted within their articles of government and that they have the prior agreement of ESFA to do so.

123. Ahead of the merger or conversion, the auditor should be consulted early in order to draw out key reporting deadlines, agreement to accounting treatment (merger or gift in substance) and audit / assurance engagement requirements. This includes the regularity reporting engagement, the scope of which may change given the business combination.

124. Many colleges will have existing lending with banks whilst others may seek further borrowing after the combination. A combination is likely to be a crystallising event (i.e. certain covenants may be triggered) under a bank’s terms of lending and this needs to be explored early. To avoid unforeseen delays during the combination process, colleges should engage with their banks at the earliest opportunity, once a clear, robust plan has been formulated.

10 “Receiving entity” is defined as either: the newly formed entity (college / academy etc) resulting from the combination, or; the pre-existing entity acquiring, or merging with the dissolving college

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125. The commissioning of external advisers may be advisable or necessary in certain circumstances. The following scenarios are examples of where audit, accounts, actuarial, legal or other advisers may be required: Where the college adopts a revaluation policy for its land and

buildings, or if the combination is in substance a gift, you may be required to commission an external valuation as at the revised period end date. This should be commissioned well ahead of the reporting deadline to ensure the work can be undertaken, fully considered by the college and subsequently reflected in the accounts.

Where the college is transferring pension members, assets and/or liabilities a different LGPS), you will be required to provide an updated valuation of the pension deficit / surplus. Consideration should be given to the engagement of an actuary and this should be done well ahead of any reporting deadline, ensuring the actuaries have sufficient time to perform the valuation of pension investment assets and pension liabilities.

Accounting approach126. FRS 102 deals with Business combinations in section 19, with further

discussions in Appendix IV (paragraphs A4.30 and A4.30A) and in Section 34 Specialised activities, where the particular circumstances of Public Benefit Entities are explored (Paragraphs PBE 34.75 onwards). The guidance on business combinations is unfortunately spread across several sources including “The Large and Medium- sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410)” – referred to as “the Regulations” in Appendix IV – and therefore Colleges should exercise caution when contemplating the accounting for, and disclosures associated with, a merger. The guidance and the discussions in Appendix IV are phrased in terms of companies legislation and should be read in that light.

127. The primary thrust of section 19 is that the acquisition (or “purchase”) method must be used for all business combinations, except for group reconstructions (for which merger accounting may be used) or for certain public benefit entity combinations. Section 34 applies to public benefit entities which involve an entity or part of an entity combining with another entity when combinations are at nil or nominal consideration which are in substance a gift, and combinations which meet the definition and criteria of a merger.

128. Colleges that are also limited companies cannot take advantage of the merger options in FRS 102. Reference should be made to Appendix IV (paragraphs A4.30 and A4.30A) of FRS 102, where the possibility of exercising the true and fair override is outlined (typically because it has been aligned with a group reconstruction).

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129. Combinations that are in substance a gift are accounted for in accordance with Section 19 except that the excess/deficit of the fair value of assets received over the fair value of the liabilities assumed is recognised as a gain/loss in income and expenditure. This represents a change to the previous UK GAAP interpretation that was set out in earlier Handbooks, allowing a “true and fair override” to take the balance straight to reserves. This would be the case in “type B” combinations where one College transfers its assets and liabilities to the other and no new corporation is formed. Colleges that previously included a negative goodwill balance instead and amortised this over an estimated useful economic life, should now recognise that balance in the year of the gift.

130. When accounting for a combination that does not meet the criteria for a merger (see below), then the assets and liabilities of the entity that is dissolving will need to be recognised at fair value on “acquisition”. In practice this will make little difference to most of the current assets and liabilities, though there may be differences to consider in particular for: Land and buildings; and Pensions liabilities.

131. Combinations that are mergers result from the creation of a new reporting entity formed from the combining parties and in which no party of the combination obtains control over the other or is otherwise seen to be dominant. This would likely (but not necessarily) be the case for “type A” combinations and may extend to “type B” combinations as well, depending on the assessment of the criteria. For a merger to be apparent, the following needs to be satisfied: No party to the combination is portrayed as the acquirer or

acquiree; There is no significant change to the classes of beneficiaries; and All parties to the combination participate in establishing the

management structure of the combined entity.

132. Regardless of which model is selected as part of the combination process, Colleges should review the criteria against their positions to be able to agree the appropriate accounting treatment. The marketing messages employed, the branding, the language in the consultation documents and the relative financial strengths will all provide evidence as to which accounting methodology should be employed. No individual criterion is definitive though some will provide a greater weighting than others – a very large financially robust College combining with a much smaller, financially weak College, will be more likely to be accounted for as an acquisition regardless of the use of the word “merger” in all the marketing communications. A College that does not transfer over a significant

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proportion of the College leadership team or the Governing Body to the new entity, could also be seen as the “acquiree” in accounting terms.

133. It should be noted that the dissolving College is by definition, NOT a going concern in accounting terms. The same applies to a Sixth Form College that is academising. Given that most of the assets and liabilities are being preserved by being transferred into either the other College or a new academy entity, then few adjustments would be expected when preparing the accounts on a basis other than going concern (often referred to as “break up basis”, but not referred to such under FRS 102). There are however some key areas to consider and the exact process behind when these changes will occur (including whether they could be avoided if the combination does not take place) will determine which entity has to deal with the adjustments: Loan breakage costs Crystalisation of pensions liabilities Changes in zero rated status of buildings because of changes of

use etc

134. In most cases the determination might be that these are conditional on the “merger” or academisation taking place and are therefore a merger/acquisition adjustment.

135. When accounting for a merger the carrying value of the assets and liabilities are not adjusted to fair value, with the only adjustments being made to ensure uniformity of accounting policies. Any merger costs should be charged as an expense in the period, as part of the profit and loss of the combined entity at the effective date of the group reconstruction.

136. The results and cash flows of the combining entity are brought together into the financial statements of the newly formed entity from the beginning of the financial period when the merger occurs. Corresponding figures should be restated to show the effect of the combination.

137. There are a number of disclosures to be made in the accounts when using the merger accounting approach, including: Name and description of the combining entities and the date of

the merger; Analysis of the current year’s total comprehensive income to

indicate the amounts relating to the newly merged entity for the period after the date of the merger and the amounts relating to each party up to the date of the merger;

An analysis of the previous year’s total comprehensive income between each College;

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Aggregate carrying value of the net assets of each College at the date of the merger; and

The nature and amount of any significant adjustments to align accounting policies and otherwise arising as a result of the merger.

138. Regardless of the type of business combination, in all cases a dissolving college is required to produce financial statements up to the point of dissolution. These should reflect a pre-combination position on the balance sheet, with the notes comprising the details of the impending combination. The Chair and Accounting Officer of the receiving entity are responsible for producing, signing and submitting these financial statements to ESFA by 31 December.

139. The members’ report for the dissolving entity should be completed on the usual basis, including reference to future activity transferred to a new entity. If the dissolving college is extending its accounting period beyond 31 July, the receiving entity is still required to submit accounts for the dissolving college to ESFA by 31 December.

140. When preparing accounts on a basis other than going concern, certain assets (not typically fixed assets) and liabilities may need to be reclassified from “non-current” to “current”. Colleges should also consider the need for any additional impairment provisions as a result of changing operations. As this is not a typical liquidation scenario, it may not be necessary for certain assets’ recoverable amount to be revalued to ‘net realisable value’ – ‘value in use’ may be more appropriate. If the assets / liabilities are being transferred to the new / receiving college corporation / / trust at book value, then it is expected that the carrying value of the assets / liabilities would be unaffected by the combination. Professional advice should be sought to ensure appropriate valuations are reflected in the accounts.

141. In either type of business combination, records (student, financial and otherwise) need to be updated in preparation of hand-over to the acquiring / newly formed corporation or trust. Certain historical records (student, financial, HR etc.) are required by HMRC to be retained for 6 years in addition to the current year). These should be handed over to, and retained by the receiving entity in line with HMRC guidelines. The dissolving entity needs to give careful consideration over how best to approach this process, both in terms of resource and logistics. Continuity and consistency of records should be priority, enabling a smooth transition into the new business combination. Preparation of records could involve, but is not limited to: ensuring all general ledgers, cash books, expenses and accounts

are fully up to date and complete

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ensuring any reconciliations and necessary adjustments have been made to all financial records and accounts

ensuring all student records are accurate and complete

Joint venture accounting142. A joint venture is a contractual arrangement whereby two or more

parties (“venturers”) undertake an activity subject to joint control, being the contractually-agreed sharing of control which exists only when the financial and operating decisions require the unanimous consent of the parties sharing control. Under FRS 102, there are three forms of joint ventures; jointly controlled operations, jointly controlled assets and jointly controlled entities. Asa reminder, under previous UK GAAP there were basically only Joint Ventures (JVs) and Joint Arrangements that are Not Entities (JANEs), with the definitions not being conditional on whether an entity existed or not.

143. On balance, there are no major changes to the accounting for joint ventures in their various guises though there will be an increase in the level of disclosures required in certain instances.

Jointly controlled operations, assets and entities144. Jointly controlled operations involve the use of assets and other

resources of the venturers rather than the establishment of an entity. Each venturer uses its own assets and incurs its own expenses and liabilities and raises its own finance which represents their own obligations. The venturer recognises in its financial statements its share of income, the assets it controls and the liabilities and expenses it incurs.

145. Jointly controlled assets exist where the venturers exert joint control over one or more assets contributed to, or acquired for the purpose of, the joint venture’s activity. Each venturer recognises in its financial statements: its share of the jointly controlled assets and any jointly incurred

liabilities; liabilities that it has incurred; income from sale or use of its share of the output of the joint

venture together with its share of expenses incurred by the joint venture; and

any expenses it has incurred in respect of its interest in the joint venture.

146. A jointly controlled entity is a joint venture that involves the establishment of an entity (unlike the two previous definitions) in which each venturer has an interest. A venturer which is not a parent shall account for jointly controlled entities using either the

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cost model, the fair value model or by measuring it at fair value with changes recognised in profit or loss for the period. In practice it is unlikely that many Colleges will be adopting the Fair Value approach unless the investments are held as an investment portfolio.

147. Colleges should consider all of their collaborative activities and consortia and identify whether they are jointly controlled operations, jointly controlled assets or jointly controlled entities. Examples may include joint teaching arrangements, joint research contracts and shared service arrangements.

148. A number of Colleges have arrangements with non-educational institutions which may include the sharing of resources, including buildings and employees, and the delivery of joint activities such as teaching and research. Colleges should have regard to whether these arrangements include jointly controlled operations, jointly controlled assets as well as having regard to other topics such as leasing and revenue recognition when accounting for these arrangements.

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Related parties149. Section 33 of FRS 102 and Section 25 of the 2015 FE HE SORP deal

with related party disclosures. This section defines related parties and emphasises thatb it is the substance of a relationship, rather than the legal form, that should be considered in determining disclosure requirements.

150. There is an exemption from disclosing transactions that are derived from dealings with government departments and agencies under paragraph 25.6 of the FEHE SORP, however, the financial statements still require the disclosure of the total funding body grants on the face of the Statement of Comprehensive Income and in the relevant notes to the accounts need to reflect the requirements of FE HE SORP paragraph 17.17, therefore the narrative in Casterbridge College reflects this accordingly.

151. The key points in the context of related party disclosures are: The name of the related party no longer needs to be disclosed,

only their relationship to the College. However, in the interests of transparency it may be helpful to provide more expansive disclosure to reassure college stakeholders that potential conflicts had been effectively managed, and the transaction complied fully with relevant policies

The total of key management compensation (see below) needs to be disclosed under FRS 102 paragraphs 33.6 to 33.7

FRS 102 paragraph 33.13 clearly states that a College “shall not state that related party transactions were made on terms equivalent to those that prevail in arm’s length transactions unless such terms can be substantiated.” This was hinted at in FRS 8 previously and noted as being unlikely to be common in practice, though most companies included such statements.

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Other accounting issuesIncome recognition

152. The accepted accounting policy for 16-to-18 grant is to recognise the amount allocated for the academic year without any accrual or provision for the following year. The funding policy of ESFA and its predecessors since the late 2000s has been to calculate recurrent grant for 16-to-18-year-olds on a lagged learner basis each year. This is a calculation only, not a recognition of either over or under delivery against a particular year’s allocation. There is therefore no right to any growth in the allocation that would be included in the following year’s allocation, nor any need to provide for the clawback if enrolments fall below the number used to calculate the allocation.

Bursaries and free college meal funds

153. The long-standing practice in FE and HE has been to account for most learner support funds paid to students on an agency basis. This has become more complicated in recent years because colleges handle several different funds.

154. FRS 102 does not discuss the agency issue in any depth. Paragraph 23.4 states “An entity shall include in revenue only the gross inflows of economic benefits received and receivable by the entity on its own account. [ ] The amounts collected on behalf of the principal are not revenue of the entity.” The Glossary in Appendix 1 defines an agent as “An entity is acting as an agent when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services.”11

155. The 2015 FE HE SORP provides more specific guidance: “Agency arrangements may exist for revenue, government grants and non-exchange transactions. Where the institution is an agent it would not normally be exposed to the majority of the benefits and risks associated with the exchange transaction (including performance of the transaction, price or credit risk). Where the institution disburses funds it has received as paying agent on behalf of a funding body or other body, and has no beneficial interest or risks related to the receipt and subsequent disbursement of the funds, these funds should be excluded from the Statement of Comprehensive Income of the institution. Any commissions received whilst acting as agent would be included as income.”

156. The position for different funds likely to be handled by colleges are:

11 FRS102

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16-18 Bursary – these funds are generally accounted for on an agency basis

Free Meals – ESFA changed funding rules a few years ago to include a requirement to return unspent funds. For this reason, they do not need to be disclose as “Agency” funds in the memorandum notes at the back of the financial statements. Colleges must recognise income and expenditure and record unused funds being taken to a funding body creditor on the balance sheet.

Discretionary Learner Support funds – ESFA amalgamated these funds into the overall Adult Education Budget since 2016/17. Control over the funds resides. For this reason, they do not need to be disclose as “Agency” funds in the memorandum notes at the back of the financial statements. Colleges must recognise income and expenditure.

Apprenticeship levy

157. Employers, including colleges, with payrolls over £3 million a year have paid the apprenticeship levy at 0.5% of pay above this threshold to HMRC since April 2017. Employers get a right to use funds up to 110% of what they pay on apprenticeship training for a period of 24 months after which point unused funds expire.

158. Colleges should record the apprenticeship levy under social security costs. The amounts are relatively small but there is a good case for adding a new line to the staff costs disclosure if desired.

159. Most colleges have firm commitments to use some of their levy payments in the form of apprentices partway through programmes and registered on the Digital Apprenticeship Service funding. In these cases, the relevant levy payment could be recognised as a prepayment for future training services in relation to that amount that will be utilised to fund approved apprenticeships within 24 months following the year end. When the training service is received, an appropriate expense would be recognised. The college would need to collect evidence to support this prepayment and should report the accounting policy in the notes.

160. The 10% 'top up' from the government would be recognised as government grant income in accordance with Section 24 of FRS 102 when the associated expense in respect of training services received is recognised.

161. Any colleges providing an apprenticeship training course will receive funds from the Department directly. This should be recognised as income in the college’s income and expenditure profit and loss account.

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Work placement capacity development fund162. In advance of the introduction of T levels from 2020, colleges will be

developing their capacity and capability for full time 16 to 18 year olds to complete a substantive work placement for vocational and technical study programmes. To help facilitate this process, ESFA has provided will be providing grants to colleges in the form of the Capacity and Delivery Fund, Cash payments started in August 2018, but some colleges recognised income prior to this, as soon capacity-building work commences, after April 2018. Work Placement Capacity and Delivery Fund (CDF) grants should be accounted for under the accrual model.

Accounting for the effects of gift aid payments by entities 163. Many Colleges have a group structure which include a subsidiary entity

that typically make gift aid payments to the parent College. Colleges should be aware of the accounting treatment for gift aid payments made by the subsidiary to the parent College and the impact this will have on both the individual subsidiary entity and parent College financial statements. Note, there will be no impact of gift aid payments within the consolidated accounts of the College, as all intercompany transactions would be fully eliminated on consolidation.

164. FRS 102 clarified through the triennial review amendments that gift aid payments made by a subsidiary to its charitable parent are distributions for accounting purposes and therefore should be treated akin to dividends. Further, the Standard clarified that where a gift aid payment is unpaid at the reporting date, it may only be recognised if a legal obligation for the subsidiary to make a payment to the charitable parent exists at the reporting date. A constructive obligation is not sufficient to recognise the gift aid payment at the reporting date. No particular challenges should arise from this change; however, some entities might need to make a prior period adjustment.

165. FRS 102 has also clarified that where the payment of the gift aid is probable and can be made within 9 months of the balance sheet date, the entity will be able to recognise the income tax consequences of the gift aid payment during the reporting period. These income tax consequences should be recognised in the profit or loss account. Early application of this amendment is possible without having to apply other amendments.

166. The Charities SORP-making body have produced Information Sheet Two which provides advisory guidance on accounting for gift aid payments made by a subsidiary to its parent charity where no legal obligation to make the payment exists. The guidance contains a number of scenarios and gives examples how the changes may be presented The guidance is written primarily for subsidiary entities of a charitable parent that apply FRS 102 which some Colleges may find helpful when accounting for gift aid payments.

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AppendixSummary of key changes in SORP 2019 (does not apply until 2019-20)

Section Change Rationale

1, Para 1.4 Sets out disclosure requirements within FRS 100 for entities which applying a SORP.

Triennial review 2017 change and included in full so that practitioners do not also have to cross-refer to FRS 100 as well as FRS 102.

1, Para 1.6 Clarification that entities that are small, as defined in company law, are permitted to adopt the small entity requirements of FRS102.

One of the amendments from the FEHE SORP Guidance Note 2015

1, Para 1.9 Paragraph simplified to remove terminology which was not consistent with Appendix 1

Minor improvements identified through review of the draft SORP

1, Para 1.23 Wording changes as the FRC issued an updated Policy Statement on developing SORPs

Consequential amendment from Triennial review 2017 changes, which emphasised the update to the FRC Policy on Development of SORPs

3, Para 3.2 Format of statements in Appendix 1 confirmed as a ‘must’ requirement, rather than a ‘should’. There was inconsistency in current SORP between this paragraph and Paragraph 3.8 where the current SORP stated that the group financial statements ‘must’ comply with Appendix 1.

Consistency improvement, in line with current sector practice that Appendix 1 represents the required financial statements formats.

3, Para 3.5 Clarifies that not all disclosures need presentation of comparative information. For example, the new net debt analysis under the new SORP does not need to be presented for prior periods.

Minor improvements for increased consistency with FRS 102 requirements.

3, Accounting for material items

Previous wording reflected only the consideration of material items in respect of the Statement of Comprehensive Income. Additional wording from FRS 102 added to make clear the requirements for the financial statements as a whole, and the Statement of Financial Position specifically.

Minor improvements for increased consistency with FRS 102 requirements.

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3, Group accounts / other matters section

These paragraphs have been included within the ‘Financial Statements’ sub-section.

Presentational improvement

3, Para 3.7 Removal of last sentence in paragraph outlining reporting requirements of subsidiaries which are charities

Improvement point as no requirement to advise on compliance requirements for other financial reporting frameworks

4, Para 4.3 Additional disclosure requirement included in relation to the nature and extent of an entity's interest in unconsolidated SPEs and risks associated with those interests.

Triennial review 2017 change - considered appropriate to include given applicability to the sector.

4, Para 4.4 Inclusion of additional exemption when a subsidiary can be excluded from consolidation on the basis of materiality

Triennial review 2017 change

4, Para 4.8 This amendment makes clear that as well as recording investments in subsidiaries, associates or joint ventures at cost less impairment, those investments can also be recorded at fair value with changes in fair value recognised in either surplus or deficit or other comprehensive income, hence producing three choices in this paragraph.

Consequential improvement identified as a result of specifying where in the Statement of Comprehensive Income changes in fair value are recognised (per para 23a)

6, Para 6.2 Various amendments in relation to financial instruments:- Clarification that there are three

options open to entities in how to account for financial instruments;

Clarification that certain presentation requirements of FRS102 must be applied where an institution adopts IAS 39 or IFRS 9 for measurement of financial instruments;

Detail inserted on the version of IAS 39 to use.

Minor improvement for consistency with FRS 102 terminology and incorporation of changes arising from Triennial review 2017

8, Para 8.3 9, Para 9.7

Changes to clarify how investments in either associates (section 8) or joint ventures (section 9) should be

Minor improvement for consistency with FRS 102

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accounted for subsequent to initial recognition.

10, Para 10.1

Insertion of wording clarifying presentation requirements for investment property in Statement of Financial Position.

Minor consequential improvement for clarification and internal consistency

10, Para 10.4

Clarification of when a mixed-use property should be separated into investment property and property, plant and equipment, including removal of ‘without undue cost or effort’ wording

Triennial review 2017 amendment

10, Para 10.5

Insertion of accounting policy choice for institutions that rent investment property to another group entity

Triennial review 2017 amendment

11, Para 11.1

Change to scope of property, plant and equipment section as a result of the accounting policy choice in relation to investment properties rented to group entities.

Triennial review 2017 amendment

11, Para 11.16

Inclusion of additional guidance and wording on componentisation of property, plant and equipment

Improvements to SORP and additional guidance added as a result of the Triennial review 2017 amendment

12, Para 12.4

Amendments to refer to the new conditions set out in section 18.8 of FRS 102 for recognition of intangible assets acquired in a business combination separately from goodwill

Triennial review 2017 amendment

12, Para 12.8

Updating SORP narrative to reflect default 10 years for useful life of an intangible where no reliable estimate can be made

One of the amendments from the FEHE SORP Guidance Note 2015

13, Para 13.3

Updating SORP narrative to highlight disclosure required where useful life of goodwill cannot be reliably estimated

One of the amendments from the FEHE SORP Guidance Note 2015

13, Para 13.7

Clarification of wording defining a merger

Minor improvement for consistency with FRS 102 terminology

13, Para Clarification of when merger One of the amendments

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13.8 accounting can be applied and reference to required disclosures for unincorporated and incorporated institutions when applying true and fair override.

from the FEHE SORP Guidance Note 2015Wording has been amended slightly from the Guidance Note to reflect disclosures where an institution is not incorporated

15, Para 15.10

Revision to wording on when a contingent liability arises

Minor improvement for consistency with FRS 102 terminology

15, Para 15.13

Updated wording in respect of prejudicial disclosures in relation to provisions, contingent liabilities or contingent assets

One of the amendments from the FEHE SORP Guidance Note 2015

21, Para 21.17

Clarification that a net defined benefit asset or liability must be recognised in the individual accounts of the group entity in a plan that shares risks between entities under common control and change in wording from legally responsible to sponsoring employer

Triennial review 2017 amendment

22, Para 22.3

Inclusion of cross-reference to inserted paragraph in FRS 102 concerning how income tax and deferred tax should be accounted for and measured on gift aid payments from subsidiaries of a charity.

Triennial review 2017 amendment – FRG to note that early adoption of this amendment individually is permitted

26, Para 26.33

The wording in FRS102 has been amended to make it clear that entities may have to refer to the recognition and measurement requirements for intangible assets for certain types of heritage assets. The SORP only currently refers to the recognition and measurement requirements of the tangible fixed assets section.

Triennial review 2017 amendment

27 Various changes to this section:- Detailed guidance on first time

adoption of FRS102 and the SORP removed, with a paragraph inserted to refer entities to FRS102 if this is applicable.

Paragraph inserted to clarify

Triennial review 2017 amendment and reassessment of what transition guidance needs to be included in the SORP

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treatment where entity previously reported under FRS102 but did not previously use the SORP.

Section updated to reflect transition requirements to SORP 2019 from SORP 2015, in line with the requirements of FRS 102 for adoption of the Triennial review 2017 amendments.

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