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Circular letter number 26/2003
For further information contact Ian Lewis, 0117 931 7336, i.lewis@hefce.ac.uk or Heather Williams, 0117 931 7113, h.williams@hefce.ac.uk
Dear Vice-Chancellor or Principal
Review of financial reporting and activity costing
1. This letter presents the report of the Financial Reporting and Activity Costing Group (FRACG) and the funding councils' proposed responses to the recommendations. Actions are shown in Annex B.
2. In July 2002, the Government published 'Investing in Innovation: a strategy for science, engineering and technology' which included actions to address concerns over the sustainability of the research base. Within the report the Government stated that it expects universities and colleges to progressively put in place systems and policies that will enable them individually to achieve a sustainable position. Investing in Innovation also stated (paragraph 3.45):
'Given the importance of transparency to research customers and Government, and the importance of setting the right financial context for university [and college] decision-making, the Government will ask the Funding Councils to review, via an independent evaluation, how best to improve further universities' [and colleges'] financial reporting and activity costing, building on the progress to date and balancing reporting requirements against the benefits to funding and universities [and colleges]' .
3. The UK higher education (HE) funding councils managed the requirement to review how to improve institutions' financial reporting and activity costing through a steering group - the Financial Reporting and Activity Costing Group (FRACG) which was established in October 2002. The group was chaired by Professor John Bull, with membership drawn from the higher education sector, the UK HE funding councils and the Learning and Skills Council.
4. The group appointed consultants (KPMG) to undertake the work on the review, and the review was completed in July 2003.
5. The work focused on three key issues:
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assessing the robustness of the Transparent Approach to Costing (TRAC) methodology for reporting full economic costs.
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assessing the validity of the present economic adjustments to reported expenditure made through TRAC - taking account of both the conceptual basis for the adjustments and the technical methods for calculating them
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reviewing the present financial reporting arrangements for universities and colleges and recommending changes where these are considered necessary.
6. The report from FRACG, including recommendations to the funding councils, is at Annex A. The KPMG report to the FRACG is on the HEFCE web-site.
7. The FRACG's conclusions are:
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the review carried out by KPMG confirmed that the TRAC methodology remains fit for purpose
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some stakeholders may require further assurance, with a more independent element, beyond the assurance arrangements established within the TRAC methodology (based on internal audit assurance that the TRAC methodology has been applied properly and consistently)
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there is a sound conceptual basis for the infrastructure (buildings) and cost of capital adjustments in determining the full economic costs of activities, but there is scope to refine and improve the methods by which these two adjustments are calculated
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there is a case for an infrastructure adjustment to apply to equipment, and a study should be undertaken to assess whether such an adjustment would be material
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the exceptional items adjustment does not represent an economic adjustment and should be dropped
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a more prescriptive form of financial reporting based on Statement of Standard Accounting Practice 25: Segmental reporting would not achieve the desired outcome of reporting the full economic costs of activities consistently across the sector
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the funding councils should consider expanding the annual Transparency Review reporting return to include both income and full costs across the five activities categories for TRAC reporting.
8. The UK HE funding councils jointly considered the recommendations in the report, and identified proposed responses and actions to implement the recommendations (see Annex B). The actions fall into two main categories:
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areas where further work is required to identify the most appropriate and cost-effective approach to implementing the recommendations (for example, assurance arrangements, basis for the calculating the infrastructure adjustment for buildings, and equipment (if appropriate), and calculation of risk-free rate of return and risk premium)
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areas for consultation with the sector or sector bodies regarding the timing for implementation of changes (for example, development of income reporting under the five activity categories for Transparency Review reporting).
9. An important area of work for the funding councils to take forward relates to the assurance arrangements for Transparency Review reporting (the second recommendation above). This will need to take account of both the needs of government for credible data for use in policy and funding decisions, and the extent of the burden on institutions in meeting these accountability requirements. It is therefore proposed to bring together the various relevant organisations (including HEIs) to identify and evaluate options, and to engage in further discussions with the Treasury on the proposed approach. In taking forward this recommendation, it will be necessary to have regard to the commitments under the Better Regulation review. It will also be necessary to anticipate the assurance requirements emerging from the development of the TRAC methodology for forecasting the full economic costs of projects or activities as a basis for cost-based funding by Research Councils, other government departments and other funders of activities for the public good.
The UK HE funding councils are committed to supporting these developments in a way that helps the sector to move toward sustainability of their activities.
Yours sincerely
Howard Newby
Chief Executive
Download
Annex A
[ MS Word 81K | Zipped Word 16K | Adobe PDF 40K | Zipped PDF 33K ]
Annex B
[ MS Word 56K | Zipped Word 22K | Adobe PDF 16K | Zipped PDF 10K ]
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