11th September 2020
We find ourselves in unprecedented times following the emergence of COVID-19 and subsequent government lockdown restrictions earlier this year. Whilst the restrictions have now been lifted and schools have re-opened to pupils at the start of the new academic year, we face a period of uncertainty over the coming months as it is still unclear what the long term implications of COVID-19 will be on the economy and the independent school sector. Effective communication will therefore be key in preparing your 2020 statutory accounts and we have provided some of the areas to consider below.
Implications for your Governors’ Report
Governors will need to consider the current and future impact of COVID-19 on schools when preparing the Governors’ Report. In the current environment, more people may take an interest in your school’s finances and what information is publicly available than they have done previously.
Those that do read the accounts may not necessarily understand everything included and so it is important that key messages are clearly communicated. Thought will need to be given to communications if your school has incurred a significant deficit as a result of the pandemic, or if the school has achieved a surplus while providing insufficient discounts in the eyes of parents. Explaining the difficult decisions made by the school is vital to keep key stakeholders onside.
When preparing the Governors’ Report, schools will need to consider the impact on the following sections of the report:
- Achievements and performance – to outline how the school was impacted post lockdown including delivery of its online provision.
- Principal risks and uncertainties – to explain what steps the school has taken to mitigate and manage the impact of COVID-19.
- Financial review and reserves policy – to explain the impact not only on the current year’s results and level of reserves held but also if there has been an impact on the school’s reserves policy in the longer term.
- Future plans – to explain whether future plans have been impacted such as significant capital projects or whether there are any further implications for the school.
Each of these sections will require careful consideration to ensure that the messaging is right for your school and reports are not merely rolled forward from previous year’s reports and updated.
Other accounting considerations
There are potential implications for other areas of the accounts which include, but are not limited to, the following:
- Treatment of furlough payments received from the Government: these should be treated as income in the accounts and not netted off staff costs to reflect the true cost of operating the school and the level of support received.
- Adequacy of bad debt provision: this will need to be re-evaluated in light of changes in financial circumstances and parents’ ability to repay debts.
- New finance obtained: additional disclosure requirements will be needed for any new financing and will include repayment terms, rate of interest to be paid on the related finance, and whether it has been secured against the school’s assets.
- Donations received from parents: if additional funds have been received from parents or other parties, you may need to consider if the donation is restricted for a particular purpose or not. You may have, for example, established a new designated fund to support additional bursary applications – which will require separate additional disclosure in the accounts.
- Valuation of school assets and liabilities: schools will need to consider if there has been any impairment of assets (such as listed investments or investment properties held) or changes in liabilities (such as defined benefit pension schemes where the school is able to identify its share of the pension deficit) following the emergence of the pandemic.
Some of these areas may require some thought and consideration and would be worth discussing with Finance Committees and auditors in advance of statutory audits commencing, if you haven’t done so already.
Going concern statement
Following the introduction of the Charities SORP (FRS 102), there has been an explicit requirement for Governors to confirm within the accounting policies section of the accounts whether the school can continue as a going concern. Going concern is usually referred to as the ability of the school to pay debts as they fall due for at least a year from when the accounts are due to be signed, but in practice and in the current environment schools should consider a period much longer than this.
In order to assist with this, it may be helpful for a paper to be prepared setting out why management and Governors believe there are no material uncertainties and that the school can pay debts as they fall due for at least one year from when the accounts will be signed. This should include reference to COVID-19, latest cash flow projections and what steps you have taken to mitigate any potential risks. This also serves as an important reminder that all Governors are responsible for the preparation of the accounts and for confirming that the school does not have any going concern issues.
As well as enabling the Governors to approve the statement in the accounts, the going concern paper will also be useful for your auditors, who will need to scrutinise the school’s assessment of going concern in more detail than they may have in the past following the outbreak of the pandemic. Audit regulators are also expecting audit firms to exercise more professional scepticism when reviewing going concern assumptions due to COVID-19 and the recent scandals in both the corporate and charity sectors.
The going concern statement in your accounts may need to be significantly updated in light of revised budgets and cash flow forecasts as schools try to mitigate the impact of COVID-19. The statement in the accounts should be drafted to reflect each school’s individual circumstances and future cash flow projections.
Do not leave drafting the report to the last minute!
As noted at the beginning of this insight, effective communication will be key in preparing this year’s report. Therefore, it should not be left to the last minute to write to ensure that the messaging in the accounts is appropriate for your school, as well as consistent with other communications the school has released since government lockdown restrictions were introduced in March. The majority of Governors’ Reports can be written without waiting for the numbers to be finalised, as much of the content will have been at the forefront of everything that schools have been dealing with over the last few months. However, this will need to be reviewed just prior to sign off to ensure that it is fully up to date with any further developments.
More interest in school accounts?
It is unclear how many parents read school accounts, but it is one way that parents can use publicly available information as a way of researching the school and making comparisons with other schools. In the current environment, parents and other interested parties may take more of an interest in your school’s finances and what information is publicly available than they have done in the past.