New Academies Financial Handbook 2019 – everything you need to know

The 2019 Academies Financial Handbook has been published by ESFA. This version will come into effect on 1 September 2019, which will replace the 2018 version.

Given ESFA’s focus over the last year, the changes and clarifications within the handbook are not unexpected and reflect the departments (and particularly Lord Agnew)’s belief that good governance and strong financial management are critical to an academy trust’s success.

Governance

The 2019 Academies Financial continues to emphasize the need for high standards of governance to be applied by all those involved in the management of academies. As expected, there are several changes to this edition which focus on this.

  • The handbook emphasizes the need for Trustees to ensure that robust governance is applied, through:
  1. Strategic leadership
  2. Accountability
  3. People with the right skills
  4. Clearly defined roles and responsibilities
  5. Compliance with statutory and contractual requirements
  6. Evaluation of governance
  • Appointing a clerk to the board is a new ‘should’ recommendation of the handbook, which emphasises the value that an appropriately experienced and knowledgeable clerk can bring to the trust.
  • Direct contract details for all members, trustees, the Accounting Officer and the Chief Financial Register are required to be added into the ‘Get Information About School’ (GIAS) register.
  • The board should act quickly where there are concerns over financial performance and have the financial skills to do so.
  • Trusts with over 250 employees are reminded of their responsibility to publish gender pay gap details on the government website, as well as the Trust’s own website.
  • Audited accounts must be provided to all the Trust’s members.
  • Trusts are reminded that they must be aware of the limits of their delegated powers and seek ESFA approval for any transactions which fall outside these powers.

Internal Scrutiny

  • All trusts must have a programme of internal scrutiny in place, to provide independent assurance to the board.
  • It is the trust’s responsibility to identify on a risk-basis, with reference to the risk register the areas to be reviewed each year.
  • Oversight must ensure that information submitted to ESFA which affects funding is accurate and complies with funding criteria.
  • A short report of work undertaken should be provided to the audit committee (or committee undertaking the functions of the audit committee) on a regular basis. In addition, an annual summary should be provided to the audit committee, and this should also be submitted to ESFA with the annual accounts. This will first apply from December 2020, in relation to the 2019/20 academic year.

Findings of internal scrutiny reports must be made available to all trustees, and not just the audit committee.

Executive (Senior Management) Pay

  • This continues to be a contentious area, decisions regarding executive pay should consider not just salary, but any other remuneration, such as pension contributions. Decisions taken should be taken having followed a robust, evidence-based process considering each individual’s role and responsibilities. The board must ensure that their approach is transparent, proportionate and justifiable. Details of considerations can be found at AFH 2.31.
  • All senior managers with significant financial responsibilities must be included on the Trust’s payroll. Non-compliance with this requirement may result in a fine from HM Treasury.

Budgeting

  • Budgeting requirements have been expanded to include consideration of estate management, particularly important for larger trusts. AFH 2.14 refers to a number of useful guides which can aid trusts with this responsibility

Risk Register

  • It is now a ‘must’ requirement for trusts to maintain a risk register

Whistle Blowing

  • Trusts are reminded that they must have a whistle blowing policy in place which has been agreed by Trustees. Trusts must ensure that staff are aware of the whistleblowing process and how their concerns will be managed.

Clarifications

  • Management accounts should include the following; income and expenditure account, balance sheet, variation to budget report and cash flow. These must be prepared monthly and shared with the chair of trustees every month. All other trustees must receive management accounts at least six times per year.
  • Related party transactions must be notified to ESFA before they occur. In addition, permission must be obtained from ESFA before a related party transaction occurs in any of the following instances:
  • A contract or other agreement exceeds £20,000
  • A contract or other agreement of any value that would mean the cumulative value of contracts and other agreements with the related party exceeds, or continues to exceed, £20,000, in the same financial year ending 31 August.
  • The above do not include salaries and other payments made by a trust to a person under a contract of employment through the trust’s payroll.
  • The handbook clarifies the Secretary of States powers where there are concerns of an individual involved with the management of a trust. These include, but are not limited to:
  • Requiring the trust to remove the individual from their position and preventing them from undertaking such a role in the future. In addition, the Secretary of State may also refer trusts to the Charity Commission or Insolvency Service, where considered appropriate.

Financial Notice to Improve

  • Trusts which receive a financial notice to improve are now required to publish this on their website. Trusts in this position have a number of their delegated authorities revoked, and details of these can be found in AFH 6.17.

ESFA are seeking to ensure that academies are achieving the high standards of governance and financial management expected by public bodies. The changes and clarifications to this version of the handbook are a clear statement of this intent, and therefore Trust’s need to ensure that their processes and procedures meet these standards.

If you’d like to discuss the implications for your trust, contact Brian Laidlaw or Marc Breeze on 0191 285 0321 or email advice@taitwalker.co.uk

ESFA releases 2018/19 Academy Accounts Direction

ESFA has released the 2018/19 Academy Accounts Direction, and as expected, there are relatively few changes this year.

A key point to note, is that clarification has finally been issued to confirm irregular expenditure includes all alcohol and unrestricted gifts – even if purchased from unrestricted funds.

The focus on governance has continued, and Trusts should expect that their auditors will be asking more questions in order to arrive issue an opinion on regularity. In particular, confirming:

  • the academy trust has a minimum of three members
  • the board of trustees has met at least three times in the year. Where the board has met less than six times a year, there is a description in its governance statement, accompanying its annual accounts, how it maintained effective oversight of funds
  •  new academy trusts have reviewed and developed their governance structure and composition of the board
  • there is a written scheme of delegation of the Board’s financial powers that maintains robust internal controls
  • management accounts are shared with the chair of trustees monthly, with other trustees six times a year and considered by the board when it meets
  • there is a risk register in place
  • there is Board oversight of capital expenditure and funding, ensuring it is used appropriately for capital purposes
  • the academy has established an audit committee or a committee fulfilling the functions of an audit committee whose activities are underpinned by written terms of reference 153
  • provision for internal scrutiny is independent and objective
  • the audit committee or equivalent has received reports on the effectiveness of internal control
  • factors determining executive pay are clear and recorded
  • there are whistleblowing procedures approved by the trustees
  • minutes of the various committees, and management accounts, have been reviewed for indications of irregular transactions
  • the board of trustees and accounting officer have given formal representations of their responsibilities

The Accounts Direction reminds Trusts of the newly introduced requirement to notify ESFA of all related parties transaction in advance, and where necessary obtain approval in advance of the transaction occurring.

As always, there are some additional requirements this year:

  • The annual report and financial statements to be sent to every member, and every person entitled to receive notice of general meetings. This reflects the requirements of the Companies Act 2006.
  • Comparative information required in respect of agency arrangements and events after the reporting date, with an update as to the current position, including, where relevant details of any contingent liabilities, guarantees, letters of comfort or indemnities arising. This provides additional clarity and may arise from an increased number of academies facing financial challenges.

Unusually, there are some disclosures which are no longer required within the financial statements:

  • Dates of payments of non-statutory or non-contractual severance payment.
  • Combined two-year funds note. This was introduced in 2018 but acknowledged by ESFA as being a misunderstanding of Charity Accounting standards.

Whilst there are a number of small changes to the AAD, these are unlikely to affect the majority of Trusts:

  • Categories of Fixed Assets have been altered to reflect those in the SARA, potentially requiring some Trusts to realign their fixed asset categories.
  • Where a trust wishes to recognise the use of premises which are occupied rent-free, it should reflect the future notional donation as a debtor, with the notional future cost recognised as a creditor. This will primarily apply to Trusts who occupy Diocese owned land and buildings under licence.

The AAD also includes a number of clarifications, which again are unlikely to affect the majority of Trusts:

  • Confirmation that donations from a trading subsidiary are only to be accrued for where a legal obligation to make the payment exists. This is in line with existing charity accounting.
  • The pension note now confirms that the government underwriting of the LGPS Scheme is in respect of Academy Trusts, not individual academies. TPS element of the pension note reflects anticipated employer contribution increases taking effect from 1 September 2019.
  • Where an asset has components which have significantly differing estimated lives, each element should be depreciated separately over its estimated life. This would rely on Trusts having accurate valuation of each component, and Trusts may wish to discuss with their auditor.
  • Grants received for capital purposes must be spent in accordance with the terms and conditions of the grant.

There are only a small number of changes to the AAD this year, those which have been introduced reflect ESFA’s continued focus on governance and transparency. If you would like to discuss any of the issues noted above, please contact Brian Laidlaw or Beth Ramsden.

Academy Related Party Transactions

From 1 April 2019, academies will be required to comply with additional requirements to declare, and in some instances receive approval from ESFA before a related party transaction takes place.

The requirements were included in the 2018 Academies’ Financial Handbook, and ESFA has now issued guidance regarding implementation. The requirements relate to new agreements made with related parties on or after 1 April 2019. The requirements do not apply to income received from a related party, ESFA intends to review its approach to these transactions prior to 1 September 2019.

The new guidelines have two requirements:

Firstly, before to entering into a new agreement with a related party, Academies must inform ESFA of their intention;

Secondly, where the agreement is for

  • A single contract or agreement in excess of £20,000; or
  • A contract or agreement of any value where the total value of contracts and agreements with that related party is in excess of £20,000 in the financial year;

The Trust must obtain permission from ESFA before entering into the contract or agreement.

Trusts should complete an online form which is found within their IDAMS account, in order to notify or obtain approval from ESFA. The online form must be completed in one step, as it cannot be saved and updated at a later point. Trusts will be required to enter details of their supplier, including name, address and Company Number. They will also be required to confirm that an ‘at cost’ assurance statement has been received from the supplier, who must be included within the Trust’s register of interests. Trusts will need to provide evidence of the following:

  • How the related party transaction was agreed;
  • That the Trust’s procurement policy was followed;
  • That the Trust tested the wider market before choosing a related party supplier; and
  • How conflicts of interests have been managed.

A copy of the agreement or proposed contract must also be submitted.

If sufficient evidence and information have been provided, ESFA will make an approval decision within 10 working days. We recommend that approval is sought as early as possible to avoid any delays in receiving goods or services.

ESFA note that where faith schools receive services which can only be delivered by the Diocese and the services provided relate to functions which are ‘fundamental to the religious character and ethos of the school’, these services are deemed to be ‘at cost’ and whilst they should be declared to ESFA, prior approval is not required.

The new requirements seek to provide transparency over an area which has continued to cause controversy and make headlines. It’s more important than ever for Trusts to ensure that the Register of Business and Pecuniary Interests is always up to date, and that policies and procedures are followed, with documentation retained to evidence this.

If you would like to find out how we can support your Trust in meeting ESFA requirements, please contact the following specialists:

Brian Laidlaw Business Services Partner 0191 285 0321 brian.laidlaw@taitwalker.co.uk

Beth Ramsden Business Services Manager 0191 285 0321 beth.ramsden@taitwalker.co.uk