A going concern

Increasingly a topic of discussion at governors and trustees meetings, going concern – technically, an academy trust’s ability to meet their liabilities as they fall due - is a current and very relevant issue for many trusts. This is irrespective of whether or not you have a forecast deficit for the year ahead.

The Charity Commission guidance is clear that as trustees, ‘you have a legal duty to look after your charity’s money and other assets. You need to understand and keep track of your charity’s income and spending to spot any issues as early as possible.’  The Commission goes on to say that in order to do this ‘you need trustees with the right skills and experience to understand financial information, identify and manage risks. Hold regular trustee meetings to keep track of income and spending against the budget. Put internal financial controls in place to make sure all spending is properly authorised.’

One area highlighted above is the need to monitor income and spending against the budget. This not only serves as a tool to keep track of any significant variations in income expected and planned costs, but also a measure of the robustness of your budgeting process.

The Academy Financial Handbook (AFH) 2015 reminds trustees that they must approve a balanced budget, but one which can take into account brought forward reserves. A lack of reserves was one of the reasons behind the very public downfall in 2015 of a high profile charity. Having a sound reserves policy in place therefore should be a must for all academy trusts. The AFH also goes on to note that a board of trustees must ‘receive and consider information on financial performance at least three times a year, and take appropriate action to ensure ongoing viability.’

A few relevant questions to consider as an academy trust might be:

  • How robust is the challenge within your trust? Do the trustees really understand the financial information they are looking at and how it has been derived?
  • Are the budgets produced broadly accurate over time and when significant variances arise, what actions are taken and are these effective?

The AFH 2015 also touches briefly on cash management, in terms of managing the cash position and avoiding going overdrawn.  In reality though, this is one of the fundamentals to going concern – it isn’t a lack of financial surplus, but a lack of cash, that creates the inability to meet liabilities as they fall due. (AFA 2015: para 2.2.4).

The area of financial sustainability is one that the EFA is already looking at in both the financial statements submitted through document exchange last December 2015, and the upcoming budget forecast returns. This return requires an academy trust to focus on the next 12 months. As trustees though, your responsibility is for the long term financial viability of the academy trust. This means thinking at least three-five years ahead, and often longer, and devising action plans to address any forecast issues. Action plans may include cost rationalisation, diversifying income streams, growing/declining pupil numbers, collaboration of some kind with other schools or academy trusts.

In addition to the above, the Governance Handbook released by the EFA on 25 November 2015 covers the topic of budget and financial management, including relating this back to ensuring there are appropriate skills on the governing body/board of trustees. The handbook notes that ‘asking the right questions is equally important in relation to money as it is to educational performance.'

Appropriate questions might include:

  • Are resources allocated in line with the school’s strategic priorities?
  • Does the school have a clear budget forecast, ideally for the next three years, which identifies spending opportunities and risks and sets how these will be mitigated?
  • Does the school have sufficient reserves to cover major changes such as re-structuring, and any risks identified in the budget forecast?
  • Is the school making best use of its budget, including in relation to planning and delivery of the curriculum?
  • Does the school plan its budgets on a bottom up basis driven by curriculum planning (ie is the school spending its money in accordance with its priorities) or is the budget set by simply making minor adjustments to last year’s budget to ensure there is a surplus?
  • Are the school’s assets and financial resources being used efficiently?
  • How can better value for money be achieved from the budget?’

On 12 January 2016 the Department’s financial health and efficiency webpage for schools was launched.

This part of the website includes a number of useful videos and tools for academy trusts, including top tips for financial planning at both operational and governor level. There is also a page entitled 'Schools financial efficiency: the role of the school governor' with access to academy benchmarking, a video to watch and other documents to read and share.

As all trusts know from the Accounts Direction, a statement by the trustees on the academy trust’s ability to continue to operate as a going concern is required as best practice in the financial statements. The Guidance on Risk Management and Internal Control and Related Financial and Business Reporting, issued by the Financial Reporting Council (FRC) is primarily directed to companies subject to the UK Corporate Governance Code but should be considered by directors and trustees of other entities as relevant guidance in this area.

This report comments that ‘the board’s specific responsibility for determining whether to adopt the going concern basis of accounting and related disclosures of material uncertainties in the financial statements is a sub set of broader responsibilities. A company that is able to adopt the going concern basis of accounting and does not have related material uncertainties to report, for the purposes of the financial statements, is not necessarily free of risks that would threaten the company’s business model, future performance, solvency or liquidity were they to materialise. The board is responsible for ensuring this distinction is understood internally and communicated externally.’

This reiterates the responsibilities of trustees of academy trusts that going concern is not just a form of words used once a year in the annual financial statements, but needs to be a sustaining ethos across the academy trust.

If you would like to discuss this in greater detail, please get in touch with Mike Cheetham.