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

ESFA Auditors Conference September 2018

Our Academies team share their experience at the recent ESFA Auditors Conference…

We attended the ESFA Auditors Conference at the Birmingham N.E.C. We heard about ESFA’s areas of focus and concern as we approach another academy audit season.

Key points from the conference

  • A key message throughout the conference was that of trust accountability. Keynote speeches by ESFA CEO, Eileen Milner and Lord Agnew, Parliamentary Under Secretary of State of the School System, noted the expectation that trusts would ‘account for every penny.’ They also reiterated the need for financial accountability to sit alongside good educational results.
  • The conference addressed the increasing responsibilities of trust board. ESFA made clear their expectation of strong governance at all trusts and that they expect this to prevent financial failure. Boards are encourage to challenge academy leadership teams and hold them accountable.
  • A number of speakers noted the importance of trusts addressing all points raised in the management letter. ESFA expects all trusts to take swift action to address points raised, and would consider any points not addressed to be a ‘red flag.’ The 2017/18 AAR will require trusts to declare the number of management letter points raised during the audit and how many points from prior years’ management letters have not been addressed.
  • ESFA consider internal assurance findings to be as important as the points raised in management letters. There is also an expectation that trusts will swiftly address these points.
  • ESFA clarified their stance in respect of trust’s purchasing alcohol – an area that has long been contentious, and confirmed that they do not expect this to take place under any circumstances.
  • Reports of compliance across the academy sector were generally good. 93.7% of 2017 financial statements were submitted on time, along with 92% of AAR’s. However, ESFA would like to see this increase further. ESFA will be ‘naming and shaming’ non-compliant trusts on an annual basis.
  • Lord Agnew was keen to emphasize that well run trusts, with good governance in place, and good exam results will face little interference from ESFA.

If you have any queries, please contact Beth Ramsden.