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11 July 2006 HEFCE logo
To Heads of HEFCE-funded higher education institutions
Direct Line 0117 931 7300
Direct Fax 0117 931 7203

Circular letter number 12/2006

For further information contact Ian Parry, tel 0117 931 7091, e-mail i.parry@hefce.ac.uk

Dear Vice-Chancellor or Principal

Changes to the model financial memorandum

1. Following consultation with sector representative bodies, we are writing to notify you of two changes that need to be made to the model financial memorandum between HEFCE and institutions.

2. As a full revision of the model FM is planned for 2007 as part of the new accountability framework, the changes will be made by updating the web-based version of the document only. The revised version, HEFCE 2006/24, is on the HEFCE web-site, www.hefce.ac.uk under Publications. The changes will be effective from 1 August 2006.

3. The first change is a consequence of implementing a new system for protecting the public interest in exchequer funding to institutions. This will be introduced during 2006-07, but with effect from 1 August 2006. Each institution will need to sign a brief agreement with HEFCE to enable the retrospective changes to take effect, and changes are needed to the FM for the future. (Further details are in paragraphs 11-14 below.)

4. The second change is needed to take into account the impact of Financial Reporting Standard (FRS) 17 (Retirement Benefits) on the financial statements of institutions from the year ending 31 July 2006.

A new system for protecting exchequer interests

5. The new system for exchequer interests will provide better accountability for public funding while reducing the existing administrative burden upon institutions and enabling them to manage their estates more flexibly.

6. The new methodology will provide a number of benefits for institutions. These include:

  1. More flexibility to manage their estates without reference to HEFCE. Individual asset disposals and reinvestments will no longer need to be reported to HEFCE, and consultation will only be required if an institution is proposing significant changes to the level of education being provided.

  2. Extinguishing the exchequer interest over time. Currently the exchequer interest exists in perpetuity. Under the rationalisation we would write off the existing and historical exchequer interest as at 31 July 2006 over 10 years, and the exchequer interest on all future grants from 1 August 2006 onwards over 15 years.

  3. Reducing the requirement to maintain records. There will be no need to trace grants and assets going back many years, and there will be no requirement to report future asset disposal or reinvestments.

  4. Simplifying and clarifying the system. The new methodology will provide a current value for the exchequer interest, and in future all new grants will be added onto a single register, providing complete clarity to HEFCE and institutions.

  5. Enabling both institutions and HEFCE to discharge their respective fiduciary duties.

Consultation with the sector and other stakeholders

7. This new system has been developed with the active participation of the sector and other stakeholders. It was overseen by a steering group with representation from the British Universities Finance Directors Group (BUFDG), Association of University Directors' of Estates (AUDE), the Department for Education and Skills and the Treasury, with the National Audit Observer observing. A pilot group of institutions has contributed, and five workshops with over 100 sector representatives were held to discuss and develop the methodology.

8. BUFDG and AUDE have both formally endorsed the new approach. Formal consultation with institutions has been via the sector's representative bodies, Universities UK and the Standing Conference of Principals, who have also expressed their support. The Committee of University Chairmen has also been kept informed.

9. Leading banks have confirmed that this approach will not be detrimental to borrowing as it does not create a security over the assets.

How it operates

10. Details of how the new system of exchequer interests will operate are included in the consultation document which was issued to sector representative bodies, and is available with this document on the HEFCE web-site. In summary the system involves:

  1. Estimating the total exchequer interest value per institution as at 31 July 2006, using a methodology based on nominating specific assets and applying a discounted insurance value.

  2. De-linking that value from individual assets so that it attaches to the institution.

  3. Tracking the exchequer interest through a simple register to which new exchequer interest funds are added and which is written off over a period of time (10 or 15 years).

  4. d. The exchequer interest may crystallise for repayment, but only in unusual circumstances such as insolvency of the institution or significant downsizing (by at least 50 per cent).

Implementation

11. In addition to the FM changes, institutions will need to sign a legal agreement with HEFCE to enable retrospective elements of the system to be enacted. A copy of the agreement is available with this document on the HEFCE web-site, www.hefce.ac.uk/exch-ints

12. Implementation is scheduled to take place throughout 2006-07 but will be backdated to 1 August 2006 as the base date for the change. All agreements will need to be signed and returned to HEFCE by 31 July 2007.

13. Technical support to institutions for the change to the new system will be provided on our behalf by RSM Robson Rhodes. It has established a web-site for institutions (http://eiproject.rsmi.co.uk) including a reference library, implementation toolkit and contact details. A user name and password will be sent by post to each institution. Queries about the project web-site should be directed to eiproject.extranet@rsmi.co.uk.

14. A spreadsheet to help institutions calculate their total exchequer interest value as at 31 July 2006 will be made available via the project website.

FRS 17 (Retirement Benefits)

15. The Accounting Standards Board issued FRS 17 on the accounting treatment of retirement benefits in November 2000. Full implementation of FRS 17 will impact upon the financial statements of institutions for the year ended 31 July 2006, that is, the current year. The main effect is that any pension scheme surplus or deficit will need to be included on the face of the balance sheet with a consequential impact on discretionary reserves.

16. Paragraph 22b of the current FM states that: 'negative discretionary reserves must be cleared by the end of the third accounting period after the year in which the deficit began to accumulate'.

17. FRS 17 means that a number of institutions will be unable to meet the above requirement due to their discretionary reserves being negative after taking into account their share of pension scheme deficits. Although some institutions may be able to clear their negative reserves by the end of the third accounting period, some will have no feasible way of doing this in the short-term. (Nevertheless, they should aim to reduce negative reserves in the longer term.)

18. Consequently we have added the following to paragraph 22 of the FM: 'For the purposes of paragraph 22 only, any pension scheme deficits included on an institution's balance sheet following the implementation of FRS 17 should be excluded. It is still expected that institutions will work towards improving any pension scheme deficits.' This applies to the financial memorandum only, and institutions are still expected to follow financial reporting standards when producing their financial statements. The change has been discussed with and is supported by BUFDG and auditors within the sector.

19. If you have any queries please contact:

  • about exchequer interests - Ian Parry, Assurance Consultant, tel 0117 931 7091, e-mail i.parry@hefce.ac.uk

  • about FRS 17 - Nolan Smith, Assurance Consultant, tel 0117 931 7376, e-mail n.smith@hefce.ac.uk.

Yours sincerely

Steve Egan
Acting Chief Executive