Academies Accounts Direction 2019 to 2020
The Education and Skills Funding Agency (“ESFA”) has released the Academies Accounts Direction (“AAD”) 2019 to 2020. This year has seen minimal changes from last year’s version of the AAD, which will be pleasing to hear during these exceptional times. The main changes in the AAD 2019 to 2020 are:
Dated: 16 June 2020 Author: Mark Gurney, Audit Associate Director
There is a further update in this years AAD on irregularity within academy trusts as a result of several ESFA investigations. Both the accounting officer’s statement of regularity, propriety and compliance, and the reporting accountant’s report on regularity should state the relevant monetary amounts, if this is known. The accounting officer’s statement should report all areas of non-compliance and this should be split between those which affect the underlying financial transactions of the trust and those which are deemed to be other weaknesses. [further details can be found at sections 3.3.2, 4.2.1, annex B (2.18) and annex B (3.12) of the AAD]
Changes to FRC Ethical Standard
The ESFA have introduced a requirement for academy trusts whose audit arrangements are affected by the revised Financial Reporting Councils (FRC) Ethical Standards to explain the actions that they have taken in order to comply with the new requirements.
The changes to the Financial Reporting Councils’ Ethical Standards now prohibits audit firms from providing any form of internal audit service where they act as the external auditor. These changes are applicable for periods commencing on or after 15 March 2020, which for academy trusts will be your accounting period commencing 1 September 2020.
Although the ESFA amended the name of the internal audit work in the Academies Financial Handbook 2019 to “internal scrutiny work”, the requirements and level of assurance are the same as internal audit work and therefore fall under the prohibited services for external auditors. It is also expected that the Academies Financial Handbook 2020 will reiterate this updated requirement and will require Trusts to employee an in-house internal auditor, perform peer reviews with another trust, use the services of a non-remunerated trustee or buy in an internal audit service from an external provider that is not your external auditor to fulfil your internal scrutiny requirements.
Where an academy trusts currently use their external auditor to perform an additional programme of work, the trust will be required to explain the actions it is taking to ensure that it complies with the new requirements. [further details can be found at section 3.2.11 and annex A – Coketown Governance of the AAD]
Preparation for external audit
The ESFA have released a checklist to assist academy trusts prepare for external audit. [further details can be found at section 4.1.5 of the AAD].
Cash flow statement and analysis of changes in net debt
The AAD introduces an analysis of changes in net debt as a note to the financial statements, to comply with the updated SORP. The changes in net debt note shows the movements in cash and cash equivalents as well as the movements in all debt that the academy trust holds. Given that the majority of academy trusts do not have any debt, or only have LA loans or Salix loans, this will be a very simple note in the financial statements. [further details can be found at section 5.3.2 and annex A – Coketown note 27 of the AAD]
ESFA requires additional disclosures to be included by trusts with multiple academies at the foot of the funds note. Where they do not have a nil balance, these disclosures must:
- identify the share of funds attributable to each academy at the end of the current and comparative period (other than pension reserve, fixed assets, and endowment funds if present)
- provide a narrative describing the action being taken by any academy in respect of which the total of these funds is a deficit
- identify the amounts spent during the period by each academy on:
- teaching and educational support staff
- other support staff
- educational supplies
- other costs
In line with other notes, where all balances are zero in both this period and the prior period, this note is not required, however a line should be added to state that a funds note has not been included because all reserve balances are zero.
The format of the funds note for an academy trust with multiple academies, including the additional disclosures, is illustrated in section 7.1.9 of the AAD.
The AAD confirms that the transfer of activities to a wholly owned subsidiary should be accounted for as a merger, to comply with the updated SORP [further details can be found at section 7.2.2 of the AAD].
Two or more subsidiaries may only be excluded from consolidation if they are not material when taken together, to comply with the updated SORP [further details can be found at section 7.2.4 of the AAD].
Governance Handbook and competency framework for governance
Where Trustees have reviewed and taken account of the guidance in the Governance Handbook and competency framework for governance, they are encouraged to refer to this in the Governance statement. [further details can be found at Annex A – Coketown Governance Statement of the AAD].
The AAD now requires the identification of legal costs incurred by the academy trust to be disclosed within charitable activities note as separate line within support costs. [further details can be found at section Annex A – Coketown note 9 of the AAD].
Teachers’ Pension Scheme
The Teachers’s Pension Scheme note has been updated to reflect the latest actuarial valuation. [further details can be found at section Annex A – Coketown note 30 of the AAD].
The AAD has been updated to ensure that academy trusts meet the changes brought in by The Companies (Miscellaneous Reporting) Regulations 2018 as well as the requirements of Section 172 (1) (a) to (f) of the Companies Act 2006. These updated requirements include:
- Engagement with employees (including disabled persons)– all trusts with more than 250 employees are required to include a statement in their trustees report summarising the action taken during the period to introduce, maintain or develop arrangements aimed at:
- Providing employees with information on matters of concern to them;
- Consulting employees or their representatives regularly so that the views of employees can be taken into account in making decisions which are likely to affect their interests;
- Encouraging the involvement of employees in the company’s performance;
- Achieving a common awareness on the part of all employees of the factors affecting the performance of the company; and
- Its policy in respect of applications for employment from disabled persons, the treatment of employees who become disabled and training, career development and promotion of disabled person.
The Department for Business, Energy & Industrial Strategy (BEIS) has published guidance to help companies understand how this affects them. In addition the Charities Commission have also published a guide: Charities SORP Information Sheet 3: The Companies (Miscellaneous Reporting) Regulations 2018 and UK Company Charities.
- Engagement with suppliers, customers and others in a business relationship with the trust- The Companies (Miscellaneous Reporting) Regulations 2018 introduce a requirement for large companies to include a statement in their directors’ (trustees’) report summarising how they have had regard to the need to foster the company’s business relationship with suppliers, customers and others. An academy trust qualifies as large if two or more of the following apply:
- Gross annual income over £36m
- Gross (total) assets over £18m
- More than 250 employees
BEIS has published guidance to help companies understand how this affects them. The Charites Commission has also published a guide: Charities SORP Information Sheet 3: The Companies (Miscellaneous Reporting) Regulations 2018 and UK Company Charities.
- Promoting the success of the company (Section 172 Reporting)- Under section 172(1)(a) to (f) of the Companies Act 2006, directors of a company must act in a way most likely to promote the success of the company, and in doing so must have regard to:
- the likely consequences of any decision in the long term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and the environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between members of the company.
The Companies (Miscellaneous Reporting) Regulations 2018 introduce a requirement for large companies to include a statement in their strategic report describing how they have had regard to the above matters.
BEIS has published guidance to help companies understand how this affects them. The Charites Commission has also published a guide: Charities SORP Information Sheet 3: The Companies (Miscellaneous Reporting) Regulations 2018 and UK Company Charities. This explains that charitable companies should take “promoting the success of the company” to mean promoting the success of the charity to achieve its charitable purposes.
The SORP Information Sheet recognises there may be overlaps between sections of the trustees’ report. It encourages charities to avoid repetition, maintain the cohesion of the narrative contained within the trustees’ report and incorporate information by cross-reference where appropriate.
- Streamlined Energy and Carbon Reporting– If the trust qualifies as a large company (as determined by sections 465 and 466 of the Companies Act 2006) and consumes more than 40,000 KWh of energy in a reporting period, it must include within its trustees report the below information in relation to its energy usage:
- Its energy use and emissions – energy usage should be measured in KWh and include as a minimum the amounts relating to gas, purchased electricity and transport fuel. Comparatives are required with the exception of the first year of reporting. Trusts are also required to report the associated greenhouse gas emissions (in tonnes of carbon dioxide equivalent). There are Government conversion factors available to assist in the measurement of energy consumption in common units.
- An emissions intensity ratio – an emission intensity ration needs to be chosen by the trust, Intensity rations compare emissions data with an appropriate business metric or financial indicator, such as income or floor space, to allow comparison over time or with other organisations.
- Methodologies used in the calculations – trusts must disclose the methodologies used in calculation of its disclosures.
- Measures taken to improve energy efficiency in the period – a narrative of measures taken to improve energy efficiency in the period of the report should be included. If there have been no measures taken during the period, this fact should be stated.
An illustrative example of the requirements is included on 96 of AAD 2019 to 2020 or section 3.1.25 of the AAD. The number in the illustrative example are all taken from the worked example contained within the good practice guide published by the ESFA
Trustees should include a brief explanation as to the factors that support their conclusion that the academy trust is a going concern. This explanation should include a balanced, proportionate and clear disclosure of any uncertainties that make the going concern assumption doubtful, or if the accounts are not prepared on a going concern basis, this fact must be disclosed, together with the basis on which the trustees have prepared the accounts and the reason the academy trust is not a going concern.
Where there are no material uncertainties about the academy trust’s ability to continue, this should be stated.
The assessment should be in respect of the foreseeable future which is at least 12 months from the date the financial statements are authorised for issue.
The ESFA have published a good practice factsheet on going concern.
There is further clarification that the requirement to have an accounting officer to sign off the regularity statement includes the period in the run-up to trust closure. [further details can be found at section Annex B – paragraph 2.26 of the AAD].
As it can been seen, the ESFA have not made many changes in this years AAD, but have continued to develop and clarify a number of items. This is to further enhance and improve the level of transparency within the academy sector.
A full copy of the Academies Accounts Direction 2019 to 2020 can be downloaded from here.
If you have any questions regarding any of the changes to this years Academies Accounts Direction, please contact a member of your engagement team or email: firstname.lastname@example.org