ACADEMIES

FIVE TOP TIPS FOR SOUND FINANCIAL MANAGEMENT OF ACADEMIES

The articles in this publication provide a broad overview of the latest legislation and the opportunities it can create. By their very nature, the articles cannot take account of individual circumstances. They are based on the latest available information and are published without responsibility on the part of Creaseys for loss occasioned to any person acting or refraining from action as a result of any information published herein. Readers are advised to seek professional guidance on any issues that they believe might be relevant to them.

1. Set the right budget

2. Appoint the right people

3. Have the right structure

4. Work to the right timetable

5. Prepare the right accounts

ACADEMIES

FIVE TOP TIPS FOR SOUND FINANCIAL MANAGEMENT

CONTENTS

If you are thinking about converting an educational establishment to an Academy – or have already pressed ahead with the process - there will be many questions to consider:

• What accounting systems and controls will be required?

• How robust are the existing financial processes?

• What new costs will now need to be accounted for?

• What comprises ‘good governance’?

• Who will be the ‘Responsible Officer’ and what does that entail?

• ...and many more.

Here, we provide our five top tips for the sound financial management of an Academy.

Of course, this guide can only scratch the surface and we would be delighted to meet with you and your board of governors to discuss your specific requirements in more detail.

INTRODUCTION

SET THE RIGHT BUDGET

• The principle of Academy funding is that the Academy will receive the same level of funding per pupil as it would have received from the Local Authority.

• An Academy receives funding directly from the Education Funding Agency (EFA), rather than the Local Authority. All of its funding is subject to a Funding Agreement, which lays out a number of requirements in respect of the application of funds, governance and reporting requirements.

• Money in an existing school budget account belongs to the Local Authority, but any surplus balance should be paid over to the Academy.

• Although the Academy will have more funding, it will have additional costs too, so the Academy needs to assess and provide for the additional responsibilities that the Local Authority previously covered.

• The Government provides start-up funding in the form of a flat rate grant of £25,000 to go towards such expenditure as project management, consultancy and transitional staffing costs.

• The main funding for Academies comes in the form of a General Annual Grant (GAG), which is made up of two main elements:

o School core funding - by far the largest element of the GAG, known as an Academy’s school budget share. The EFA make small adjustments to reflect any reduced business rates paid by an Academy as a charitable trust, and for insurance, which is paid separately in the GAG. o Local Authority Central Spend Equivalent Grant (LACSEG) - this is additional money to cover the cost of education services that the local authority provides to its maintained schools but which Academies are free to secure independently.

• As mentioned above, the new funding arrangements mean that the Academy can choose where to source its supplies and procure services specific to its needs. Many will argue that this increased level of control is a good thing.

• As a separate legal entity, the Academy will need to open new bank accounts to receive the EFA funding.

• An Academy cannot run in deficit and, if that looks likely, the Academy will have to go back to the EFA and agree a restructuring plan. Accurate budgeting is, therefore, a key element of good financial management.

Accurate budgeting is the key to good financial management. You will need to get used to new sources of income and new costs

APPOINT THE RIGHT PEOPLE

• The funding agreement requires an Academy to appoint an Accounting Officer (AO). The AO (generally the Academy principal) is responsible for keeping proper accounts, prudent and economical administration, the avoidance of waste and extravagance and the efficient and effective use of all the resources in their charge. The AO can delegate or appoint others to assist in these responsibilities.

• The Department for Education also requires the Academy to appoint a Responsible Officer (RO). This post is designed to provide an independent oversight of the Academy’s financial affairs. In particular the RO should provide assurance that:

o the financial responsibilities of the governing body are being properly discharged

o resources are being managed in an efficient and effective manner

o there is a sound system of internal financial control

o financial considerations are fully taken into account in reaching decisions

• The Academies Financial Handbook outlines guidance for the RO and details the expected checks to be performed – effectively an internal audit. The RO is normally one of the governors, but the role can be outsourced if none of the governors feel sufficiently qualified to take up the appointment.

• There is no stipulation that Academies must have a Finance Director with accountancy qualifications, but the accounting and reporting requirements are quite complex and it might worth considering buying in accountancy expertise, particularly in the early years.

Becoming an Academy means appointing people to important new roles, some of which you might prefer to outsource

HAVE THE RIGHT STRUCTURE

• The basic structure of an Academy is that of a company limited by guarantee. This means that the personal liability of the directors is limited to the amount of their guarantee.

• Academies are exempt charities, so they do not have to report to the Charity Commission, but they must follow the Charities Statement of Recommended Practice (SORP).

• Like Local Authorities, an Academy is regarded as a Section 33 body, which means that it can, prima facie, recover input VAT – that is tax on its costs.

• An Academy will need to consider whether they ought to register for VAT, which brings with it a number of issues to watch out for. Much depends on what income streams the Academy will be able to enjoy beyond those grants provided by the EFA.

• Generally, an Academy will be looking to its new found freedom to raise additional funds, possibly from fundraising events, the use of the school facilities or the provision of catering.

• VAT issues have to be considered here – and the rules are complex. For example, the provision of adult education is an exempt activity, whilst the sale of tickets to a gala fundraising dinner is standard rated.

• Input tax needs to be analysed between “attributable” and “general” and then claimed accordingly.

• If trading is conducted within an Academy, then, apart from the VAT complications, it is subject to the same rules as registered charities, which can be a little restrictive.

• One option that you might consider is the setting up of a separate company – a trading subsidiary - to put non state funded activities through.

• Profits generated by the trading company can be paid over to the Academy under Corporate Gift Aid to avoid Corporation Tax.

• Obtaining professional advice in this area is strongly recommended.

The corporate structure that you choose for your Academy will affect many things, including your VAT status and Corporation Tax liabilities

WORK TO THE RIGHT TIMETABLE

• The EFA is responsible for monitoring Academies and this monitoring is carried out by the completion of several returns during the year, in addition to the annual audited accounts.

• The Young People’s Learning Agency (YPLA), whose responsibilities were transferred to the EFA with effect from 1 April 2012, had pledged to reduce the number of returns needing to be made by successful Academies, whilst still maintaining an effective oversight. This trend has continued.

• The EFA returns now comprise a GAG2, which contains budget projections, an Abbreviated Accounts Return (AAR) and a Financial Management and Governance Evaluation Return (FMGE). The EFA also need to receive a copy of the Full Financial Statements and, if requested, a Whole of Government Accounts Return.

• By the 31 July each year (or within six weeks of receipt of the final funding letter for newly converted Academies), an Academy must complete Form GAG2, which provides assurance to Governors and the EFA that the Academy will be in good financial health for the coming year.

• By the end of December each year (except in Year One, in which case it is within four months of opening) Academies will have to complete a FMGE.

• The AAR comprises a summary income and expenditure account and balance sheet information, which provides data in a consistent form to allow monitoring of financial health and benchmarking. The EFA require the AAR to be submitted by 31 December, which is the same date as the full audited accounts must be filed.

• The audited accounts must be submitted no later than 31 December. The accounts must also be lodged with the Registrar of Companies within 9 months of the year end, i.e. by 31 May each year. As exempt charities, there is no requirement for the accounts of the Academy to be submitted to the Charity Commission.

• The EFA will review the audited accounts and is empowered to carry out financial management review visits.

• As mentioned above, but only upon request from the EFA, an Academy must also file a Whole of Government Accounts Return. This contains financial data to 31 March and is a statutory requirement for the Department of Education to produce a return under the Government Resources and Accounts Act 2000.

The rules on reporting are strict and the timescales can be tight for the unprepared

PREPARE THE RIGHT ACCOUNTS

• Although the Academy Trust is a charity, it is an exempt charity and as such is monitored by the EFA rather than the Charity Commission. However, the financial statements still have to comply with the Charities SORP and the Companies Acts. Within the Academies Financial Handbook, there is a model set of accounts set out under the name ‘Coketown Academy Trust Limited’ to help guide you on what is required.

• The accounts comprise an Annual Report and Financial Statements.

• The Annual Report includes:o A governors’ report – This is virtually identical to the trustees annual report that would be seen on any charity and will need to include details of the Academy’s structure governance and management, the recruitment and training of governors, objectives and activities, a financial review, a risk statement, reserves policy and plans for future periodso A statement on internal controlo A statement of governors’/trustees’ responsibilitieso An independent auditors’ report

• The Financial Statements include:o A statement of financial activities (SOFA) – There is a requirement to separate out restricted funds from general funds. Restricted funds are split between restricted income funds and restricted capital funds as all transactions must go through the SOFA o A balance sheeto A cash flow statement

o A statement of accounting policies (always Note 1)o Other notes to the financial statementso An Income and Expenditure account (Companies Act requirement) and Statement of Total Recognised Gains and Losses (STRGL) where relevanto The GAG Results and Carry Forward (always Note 2), which sets out the 12% test and the 2% test. Only up to 12% of the total GAG payable can be carried forward from one year to the next. Of the 12% carried forward, up to 2% of the total GAG payable can be spent on any purpose, but the remainder (i.e. 10%) must be spent on the upkeep of premises (capital or revenue spend). If the 12% or 2% rules are breached, then part of the GAG has to be paid back to the LEA.

• Points to watch are:o Establishing appropriate accounting policieso Setting up of reserves – restricted, designated and unrestrictedo Assets transferred to the Academy upon conversion are treated as donated assets under Financial Reporting Standard (FRS) 15. Credit is via the SOFA into a restricted Fixed Asset Fund

• The GAG calculationso Pensions – presentation and supporting disclosures.

The right advisers will help you prepare the right accounts and avoid any potentially costly mistakes

ABOUT US

Over the years, Creaseys has helped several independent schools with their accounting and auditing needs.

Today we act for a number of educational establishments, helping them, not only with their year-end reporting, but also advising them on matters such as good governance, internal controls and VAT.

We have now extended our service provision to help those schools seeking to convert to Academy status. You can read more about converting to Academy status and the accounting issues by asking for our white paper or downloading it from our website.

We can provide support through the conversion process by:

o Advising on accounting systems and controlso Reviewing your financial processes and finance manualo Advising on good governanceo Acting as your Responsible Officer

At the end of your first year, we can perform the external audit function and advise on matters of accounting, such as disclosure requirements, asset valuation and the impact of FRS 17 (re. pensions) on your accounts.

We want to become your trusted adviser and as such are well placed to assist with ongoing matters such as:

o Charity or exempt charity issues o VAT registration o Returns to the EFAo Helping prepare your Forward Financial Plan

Call us for an informal chat on 01892 546546 and ask for the Education team. We’ll be delighted to hear from you.

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Creaseys is an independent member firm of IGAF Polaris

Members: Robert Blundell FCA Richard Holme CTA FCA TEP James Pearce FCA Emma Roberts FCA Elizabeth Robertson FCA Graham Turpin FCA Roger Ward FCA

Creaseys LLP is a limited liability partnership (registered in England with the number OC319671) whose registered office is at 12 Lonsdale Gardens, Tunbridge Wells, Kent TN1 1PA. Creaseys is a trading name of Creaseys LLP.

01892 546546 www.creaseys.co.uk