The world of accounting reporting is changing with the advent of a completely new set of rules know as Financial Reporting Standard 102 (FRS 102), which is impacting on schools of all sizes.
Whilst FRS102 has brought in new names for the Balance Sheet (now called the ‘Statement of Financial Position’) and Profit and Loss Account (‘Income Statement’), there are still options to retain existing terminology. Charitable schools adopting the new FRS102 Charity SORP will not see the same radical name changes, with Statement of Financial Activities and Balance Sheet remaining, but all schools will see changes to the accounting policies and new disclosures.
The year ending 31 August 2016 will be the first year of the new regime for most schools and from our experience of those entities already subject to this regime, there are several areas that governors need to consider.
The measurement methodology looking at the value of assets and liabilities has changed and some new liabilities will be created. Items to consider include:
- Valuation of Property - Most schools show their freehold properties at historic cost, which may mean that there is a significant variance to actual value. Under FRS102 a school may elect to revalue the property on a one-off basis on adoption of the new standard without incurring the obligation to revalue regularly in the future. This may have a positive impact on the school’s balance sheet if the property value increases, although a large revaluation gain will go through the Profit and Loss account/Statement of Financial Activities and the annual depreciation charge will increase. Thought needs to be given whether this ultimately is beneficial for the school.
- Loan Liabilities – Complex, long term loans are often taken out by some schools to fund new building projects. These will have to be shown at ‘fair value’, with changes going through the Profit and Loss/ Statement of Financial Activities.
- Advance fee scheme liabilities - Schools running schemes which allow parents to make lump sum payments in advance to pay/partly pay future school fees will find that these will these now have to be recognised as ‘other financial instruments’ and measured at ‘fair value’. Consideration will need to be given to discounting the future liability to parents using a discounted cash flow calculation.
- Multi-year bursaries - Where schools give scholarships or bursaries which are capable of lasting more than one year, without some form of annual review, the full liability of the remission given over the school life of the pupil at the school will have to be recognised in the accounts in the year when the remission is given.
- Holiday Pay - There is now a requirement to recognise a liability in the balance sheet for any outstanding paid annual leave and sick leave, if this is material. This is more likely to be an issue for those schools where the holiday year is not coterminous with the financial year.
Additional disclosures which will be common to many schools include:
- Statement of Cash flow – Currently only the accounts of larger schools contain a Cash flow Statement, but all charitable schools will have one as well. Although it may be a bit more work to prepare, a Cash flow Statement can useful for illustrating whether the school generates cash and how it has been used.
- Key management personnel – FRS102 requires the aggregate figure for the remuneration of ‘Key Management Personnel’ to be disclosed, as well as the names of those people forming this group.
- Related Party Transactions - any transactions (of an expense, or income nature) involving a governor or other related party must now always be regarded as material transactions, meaning that there are likely to be more transactions to be disclosed in the financial statements.
The transition to FRS102 will take time and money and so we recommend that you consider how FRS102 may impact on your school as early as possible.