Report 00/25

Model financial memorandum between the HEFCE and institutions

This version of the memorandum is superseded by HEFCE 2010/19 from 1 August 2010.

This document is also available in Word (616K).

The template referred to in Appendix 2 can be downloaded.
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(added 26 April 2002)

Contents

Introduction

1. This memorandum sets out the terms and conditions for the payment by the Higher Education Funding Council for England of funds to the governing body of (name of institution) out of funds made available by the Secretary of State for Education and Employment.

   Definitions

2. In this memorandum, the following definitions apply.

   academic year	the 12 months from 1 August to 31 July
   accounting period	the period covered by the institution's audited financial statements, usually the 12 months from 1 August to 31 July
   capital expenditure	expenditure used to create or purchase a new asset, replace an existing asset, or refurbish or remodel an existing asset
   Chief Officer of the Council	the Chief Executive of the HEFCE
   Council	the Higher Education Funding Council for England (HEFCE). See also 'predecessor Councils'
   CUC	Committee of University Chairmen
   deficit	the historical costs deficit as given in the ‘Note of historical cost surpluses and deficits’ in the Statement of Recommended Practice (SORP): ‘Accounting in Higher Education Institutions’
   DfEE	Department for Education and Employment
   Exchequer funds	Government grant or grant-in-aid – including grants paid on the advice of the University Grants Committee, grants paid by the HEFCE and its predecessor Councils, grants paid by the DfEE to former voluntary and direct grant colleges, and grants from the Research Councils. It does not include funds provided by a local authority
   Exchequer-funded assets	assets acquired or developed, wholly or in part, with Exchequer funds in the form of specific capital funds. This does not include assets where the ownership was transferred from a local authority to a higher education institution on or after 1 April 1989
   FE college	a college in the further education sector
   FEFC	Further Education Funding Council
   FRS	Financial reporting standard
   GAAP	Generally accepted accounting principles
   governing body	the university council, board of governors or other body ultimately responsible for the management and administration of the institution's revenue and property, and the conduct of its affairs
   HEFCE	Higher Education Funding Council for England
   HEI	higher education institution
   HESA	Higher Education Statistics Agency
   the institution	(name of institution)
   JANET	the Joint Academic Network, an electronic network supported by the four higher education funding bodies which links universities and colleges in the UK. SuperJANET is the enhanced network
   lead accountability	refers to lead accountability in all institutions designated by the DfEE as higher education institutions, except where the DfEE has assigned the lead accountability role to the TTA. These will normally be institutions which receive 55 per cent or more of their recurrent grant (that is, the combined recurrent grant from the TTA and the Council) from the TTA
   licence	any licence other than a licence of residential accommodation to a registered student
   month	calendar month
   overseas activities	those activities taking place outside the United Kingdom of Great Britain and Northern Ireland
   PFI	Private Finance Initiative
   PPP	public-private partnership
   predecessor Councils	the Polytechnics and Colleges Funding Council and the Universities Funding Council, including responsibilities inherited from the University Grants Committee under the Education Reform Act 1988
   providing body	the providing body of a former voluntary college directly funded by the DfEE
   QAA	Quality Assurance Agency for Higher Education
   Secretary of State	the Secretary of State for Education and Employment
   SSAP	Statement of Standard Accounting Practice
   SuperJANET	see JANET
   TTA	Teaching Training Agency
   1998 Act	the Teaching and Higher Education Act 1998
   1992 Act	the Further and Higher Education Act 1992

   References to the financial position, financial statements, financial commitments or borrowing of the institution mean the consolidated financial position, financial statements, financial commitments or borrowing of the institution and its subsidiary undertakings, as defined in the Companies Act 1985 and revised by the Companies Act 1989, and in accordance with generally accepted accounting principles.

   Shall and must denote mandatory requirements, and should denotes the Council's view of good practice.

   Application

3. This memorandum is in two parts. Part 1 sets out the terms and conditions which apply in common to those institutions listed in paragraphs 5 to 7. Part 2, the schedule, gives conditions specific to the institution, a schedule of funds available in the academic year, and the educational provision the institution has agreed to make in return for those funds. References to this memorandum embrace both Part 1 and Part 2.
4. Nothing in this memorandum shall require the institution to act in a manner which would cause it to lose its charitable status, or which would be inconsistent with its charter and statutes.

   Scope

5. The terms and conditions in this memorandum apply to all institutions for which the Council has lead accountability.
6. The following sections also apply to any institution for which the TTA has lead accountability and which receives funds from the Council:
   • Introduction (paragraphs 1-4)
   • Compliance with financial memorandum (paragraph 8-9)
   • Responsibilities of the Council (paragraphs 10-12 and 14-15)
   • Stewardship (paragraphs 16-17)
   • Provision of information (paragraphs 24-27)
   • Connection to JANET or SuperJANET (paragraphs 29-30)
   • Allocation and payment of funds (paragraphs 32-42)
   • Estate management (paragraphs 43-54)
   • Financial commitments (paragraphs 55-60)
   • Monitoring (paragraph 61)
   • Other matters (paragraphs 74-77).
7. The following sections also apply, via Part 2 of the financial memorandum, to any institution for which the FEFC has lead accountability and which receives funds from the Council.
   • Introduction (paragraphs 1-4)
   • Compliance with financial memorandum (paragraph 8-9)
   • Responsibilities of the Council (paragraphs 10-12 and 14-15)
   • Stewardship (paragraphs 16-17)
   • Provision of information (paragraphs 24-27)
   • Connection to JANET or SuperJANET (paragraphs 29-30)
   • Allocation and payment of funds (paragraphs 32-35 and 39-42)
   • Other matters (paragraphs 74-77).

   Compliance with financial memorandum

8. The responsibility for ensuring that the institution complies with this memorandum and related guidance rests with the governing body of the institution.
9. In exercising its powers under this memorandum, the Council will act reasonably at all times.

   Responsibilities of the Council

10. Payments to the institution by the Council are in support of activities specified in section 65(2) of the 1992 Act, namely:

    for higher education institutions:

    1. The provision of education and the undertaking of research.
    2. The provision of any facilities, and the carrying on of any activities, which the governing body of the institution considers it necessary or desirable to provide or carry on for the purpose of, or in connection with, education or research.

    for further education institutions:

    3. The provision by such institutions as are within the further education sector of prescribed courses of higher education.
11. Payments will be subject to the provisions of the 1992 Act, the conditions set out in this memorandum, and such terms and conditions as the Council may from time to time prescribe in accordance with the 1992 Act, and after the consultation required under section 66(1) of the Act. The payment of funds will, in accordance with section 65(3) of the 1992 Act, be subject to such terms and conditions as the Council may impose, including those set out in this memorandum. However, in accordance with section 65(4) of the 1992 Act, these terms and conditions will not relate to the application by the institution of any sums derived otherwise than from the Council. In determining what funds to allocate to the institution the Council does not wish to discourage the institution from maintaining and developing its funding from other sources, in accordance with section 66(2) of the 1992 Act.
12. The Chief Executive of the Council has been appointed as its Accounting Officer. As such he is responsible and accountable to Parliament for ensuring that the funds received from the Secretary of State are used for the purposes for which they were given, and in ways that comply with the conditions attached to them. The Chief Executive is also responsible for promoting good value for money through grants paid to institutions and associated guidance.
13. As part of these responsibilities the Chief Executive must be satisfied that the governing body of the institution has appropriate arrangements for financial management and accounting, and that the Council's funds are used for the purposes for which they were given.
14. In his role as Accounting Officer, the Chief Executive of the Council shall inform the institution's governing body and/or its audit committee if he has serious concerns about the institution’s financial affairs.
15. In his role as Accounting Officer, the Chief Executive of the Council may suspend the payment of grant, either in whole or in part and either permanently or temporarily, if in his opinion it is appropriate and reasonable to do so in order to safeguard public funds.

    Responsibilities of the institution

    Stewardship

16. The governing body of the institution is responsible for ensuring that funds from the Council are used only in accordance with the 1992 Act, this memorandum and any other conditions that the Council may from time to time prescribe.
17. The governing body has a wide discretion over its use of public funds, and is ultimately responsible for the proper stewardship of those funds. Therefore it must ensure that it exercises its discretion reasonably, and takes into account any relevant guidance on accountability or propriety issued from time to time by the Council, the National Audit Office or the Public Accounts Committee.

    Designation of principal officer

18. The governing body shall designate a principal officer of the institution, who will normally be the head of the institution, and shall notify the Council whenever it designates such an officer. The designated officer will need to satisfy the governing body that the conditions in this memorandum are complied with, and may be required to appear before the Public Accounts Committee alongside the Chief Executive of the Council on matters relating to grants to the institution.
19. The designated officer shall advise the governing body if, at any time, any action or policy under consideration by the governing body appears to the designated officer to be incompatible with the terms of this memorandum. If the governing body decides nevertheless to proceed, the designated officer must immediately inform the Chief Executive of the Council in writing.

    Financial management

20. The governing body of the institution must ensure that it has a sound system of internal financial management and control.
21. The governing body of the institution shall plan and conduct its financial and academic affairs to ensure that it remains solvent and that, taking one accounting period with another, its total expenditure is not greater than its total income.
22. In meeting the requirement in paragraph 21:
    1. The institution shall not have a historical cost deficit in two consecutive accounting periods unless there are sufficient discretionary reserves to cover the deficit. (Discretionary reserves comprise general endowments and income and expenditure account reserves as defined in the Statement of Recommended Practice: ‘Further and Higher Education Institutions'.). A deficit of less than 0.5 per cent of total income -- as defined in the audited financial statements for the year in question, or £500,000, whichever is the lower -- will not be taken into consideration for these purposes.
    2. Negative discretionary reserves must be cleared by the end of the third accounting period after the year in which the deficit began to accumulate. (That is, negative discretionary reserves occurring by the end of year 1 must be cleared by the end of year 4). An accumulated deficit will be regarded as cleared if it is less than 0.5 per cent of total income as recorded in the institution's financial statements for the latest accounting period, or £500,000, whichever is the lower.

    The Council may, at its discretion, waive these conditions and substitute others on written application from the institution.

    Value for money

23. The governing body is responsible for delivering value for money from public funds. It should keep under review its arrangements for managing all the resources under its control, taking into account guidance on good practice issued from time to time by the Council, the National Audit Office or the Public Accounts Committee.

    Provision of information

24. The institution shall provide the Council, or its agents acting on its behalf, with whatever information the Council requires to exercise its functions under the 1992 Act. This information shall be of a satisfactory quality and shall be provided at the times and in the formats specified by the Council or its agents.
25. The Council will act reasonably in its requests for information and will have regard to the costs of providing this information, and, where appropriate, to its confidentiality.
26. If the institution fails to return information required by the Council by the specified deadline, or that information is not of a satisfactory quality, the Council reserves the right to do either or both of the following:
    1. To carry out whatever investigations it deems necessary to collect the data. All or part of the cost of such investigations may, where circumstances warrant it, be deducted from the institution's recurrent grant. (This power relates to information required by the Council and returned to the Council or to its agents acting on its behalf.)
    2. To use its own reasonable estimates of data which it requires to exercise its functions under the Act.
27. If the institution is overpaid grant as a result of the Council using estimated data, the Council reserves the right to recover any overpaid grant, plus interest, in accordance with paragraph 42 below.

    HESA and QAA

28. The institution shall subscribe to HESA and to the QAA.

    Connection to JANET or SuperJANET

29. The institution shall take appropriate measures, including signing its acceptance of the Acceptable Use Policy, to ensure that its use of JANET or SuperJANET, and networks connected to JANET or SuperJANET, conforms to acceptable practice and current legislation.
30. The Council reserves the right to withdraw the institution's connection to JANET or SuperJANET if it does not take the appropriate measures referred to in paragraph 29.

    Insurance

31. The institution must ensure that it has adequate insurance cover.

    Allocation and payment of funds

32. The Council will determine the amount of funds to be allocated to the institution in any year and may, in its allocations, distinguish between recurrent and capital funds. The Council may also, in its capital allocations, distinguish between formula capital funds and project capital funds.
33. The institution shall only use Council funds for the activities eligible for funding as specified in sub-sections 65(2)(a), (b) and (c) of the 1992 Act. This condition also applies where the HEI passes on a part of its HEFCE grant to another, legally distinct entity for provision of an activity which is eligible for funding. That includes passing on grant to colleges in the further education sector, and to colleges, schools or other education providers outside the higher and further education sectors.
    1. The HEI must retain sufficient oversight that it may properly be considered to be 'providing' the education, 'undertaking' the research or 'providing' the related facilities or activities, except in cases where:
       1. the body to which the HEI passes funds is an HEI in its own right, and
       2. the Council has given its consent to that arrangement.
    2. This oversight should cover, among other areas, both financial accountability and quality assurance. A written statement of the arrangements should be agreed by both parties: these should ensure that the chain of accountability for the use of Council funds is not broken and that the relevant parts of the financial memorandum flow to the eventual user of the funding. If an HEI proposes to pass funds to a connected institution under Section 27 of the 1998 Act, the Council's consent must first be obtained.
    3. In cases where an HEI or an FE college is acting as the lead institution receiving HEFCE funding on behalf of a consortium of institutions providing higher education programmes, the onward transmission of that funding from the HEI or FE college to the consortium members should be governed by a consortium agreement. That agreement should be prepared in accordance with the principles set out in HEFCE 00/02 (HE in FE colleges: Draft code of practice for consortia, January 2000). or any subsequent code of practice for consortia.
34. The institution shall use any funds which the Council has earmarked or provided for specific recurrent or capital purposes, solely for those purposes.
35. If any Council funds which were earmarked or provided for specific purposes, are used for other purposes, the institution must report such use to the Council as soon as it becomes aware of it.
36. The Council will normally pay formula funds to the institution in monthly instalments, in accordance with a funding profile for the academic year which takes account of expected need within the higher education sector as a whole, and receipts of tuition fees from students and the Student Loans Company.
37. The Council will also be prepared, on written application from the institution, to consider making exceptional or ad hoc payments. However such payments will not be made in advance of the institution's need to make disbursements.
38. The Council may contribute to the costs of capital projects submitted at its request andwhich conform to criteria set by the Council.
39. The Council will pay its agreed contribution to the costs of capital projects in accordance with a payment profile agreed with the institution, as set out in the associated conditions of grant, and on submission of a final claim which has been accepted by the Council.
40. The Council will notify the institution, in writing, of the allocations of formula funds as soon as possible - normally by 31 March - in advance of the academic year to which they relate.
41. If the institution fails to comply with any conditions attached by the Council to the payment of funds, the Council reserves the right to require the institution to repay all or part of those funds.
42. The Council also reserves the right to require the institution to pay interest, at 2 per cent over the Bank of England base rate, in respect of any period during which a sum due to the Council under this or any other condition remains unpaid.

    Estate management

43. The institution shall manage and develop its estate with regard to the guidance issued from time to time by the Council on estate procedures.
44. The institution shall keep its holdings of land and buildings under review with the objective of rationalising and disposing of those which it considers, in light of its estate strategy, to be no longer needed. Former voluntary colleges and other institutions holding land and buildings not covered by exempt charitable status shall also take into account the requirements of the Charity Commissioners.
45. The institution shall maintain its estate in accordance with a maintenance plan, covering its long-term and routine maintenance requirements.

    Disposal of any interest in an Exchequer-funded asset

    Sale

46. The institution may sell any land and buildings, including any interest in land and buildings, which were acquired or developed in whole or in part using Exchequer funds, provided that all the following conditions are satisfied:
    1. The institution has taken independent professional advice on the terms and conditions of the sale.
    2. Having considered that advice, the institution decides it is satisfied that the terms and conditions under which the sale is proposed are the best that can reasonably be obtained for the institution at that time.
    3. The institution notifies the Council, in writing, of the sale within 15 working days of the exchange of contracts.
47. Where a sale described in paragraph 46 occurs, the institution may retain, and subsequently reinvest, the proceeds of that sale provided that all the following conditions are satisfied: (All references to sale proceeds shall include the accrued interest earned on the sale proceeds between the date of receipt of the proceeds and the date of the reinvestment of those proceeds.)
    1. The proceeds are reinvested, within three years, on capital assets with a life of more than 12 months.
    2. The new assets are used for activities eligible for funding as specified in sub-sections 65(2)(a) and (b) of the 1992 Act.
    3. There is no reinvestment in assets that are used primarily for the activities listed in paragraph 62 below.
    4. Where the expenditure is on an estates project, it conforms with the institution's current estate strategy and the institution has regard to Council guidance, issued from time to time, on appraising investment decisions. (The Council’s current guidance is ‘Appraising investment decisions’ (HEFCE 99/21, March 1999).)
    5. The institution notifies the Council in writing within 15 working days of the date that the sale proceeds are first reinvested. If the reinvestment is done in stages, the institution must notify the Council in writing within 15 working days of each stage of the reinvestment.
48. If the conditions in paragraph 47 are not satisfied, the institution shall pay a sum to the Council, which varies according to the circumstances:
    1. Where the Exchequer funds were provided before 1 August 1975, the institution must pay an amount equal to the original value of the Exchequer funds.
    2. Where the interest in the land and buildings was acquired or developed since 1 August 1975, wholly with the aid of Exchequer funds, the institution must pay all the sale proceeds to the Council, after deducting the expenses of the transaction. The payment must include any element in respect of intangible assets sold as part of the transaction.
    3. If neither sub-paragraphs 48a nor 48b apply, the institution must pay to the Council that proportion of the sale proceeds, after deducting the expenses of the transaction, which corresponds to the value of the Exchequer funds as a percentage of the costs of acquisition or development of the land and buildings, at the date of acquisition or development.
    4. If the institution reinvests only part of the sale proceeds in accordance with sub-paragraph 47a, but all other conditions in paragraph 47 are satisfied, the institution must pay to the Council that part of the sale proceeds that is not reinvested in accordance with sub-paragraph 47a, subject to sub-paragraphs 48a-c above.
    5. Where the sale proceeds are only partly reinvested within three years, but all other conditions in paragraph 47 are satisfied, the institution shall pay to the Council that part of the sale proceeds that is not reinvested within three years, subject to sub-paragraphs 48a-c above.
    6. Except that, where disposal or transfer is being considered as part of a PFI deal, sympathetic consideration will be given to the re-use of the proceeds to fund or reduce contractual payments over the life of the PFI contract, where in the light of the facts of each case, this appears to be reasonable and to offer value for money.

    Leases

49. The institution may grant a lease or licence over land and buildings acquired or developed, whether wholly or in part, with Exchequer funds, provided that all the following conditions are satisfied:

    a. The institution has taken independent professional advice on the terms and conditions of the lease or licence.

    b. Having considered that advice, the institution decides it is satisfied that the terms and conditions under which the lease or licence is proposed are the best that can reasonably be obtained at that time.

    c. The institution notifies the Council in writing of the lease or licence within 15 working days of its execution.

50. Where a lease or licence as described in paragraph 49 is granted, and part or all of the consideration for granting it is the payment of a premium, that premium shall be treated as sale proceeds. Therefore paragraphs 47 and 48 apply to the institution's use of the premium. If the consideration also includes periodic payments of rent during the life of the lease or licence, these shall be treated as rental income, and paragraph 51 shall apply to their use by the institution.
51. Where such a lease or licence as described in paragraph 49 is granted, the institution may retain the rental income provided that both the following conditions are satisfied:

    a. The rental income is used for activities eligible for funding as specified in sub-sections 65(2)(a) and (b) of the 1992 Act, but taking account of the ineligible activities set out in paragraphs 62 and 63 below.

    b. The institution notifies the Council in writing within 15 working days of the date the sale proceeds are first reinvested.

52. If the conditions in paragraph 51 are not satisfied, the institution shall repay to the Council the rental income, in full or in the proportion outlined in paragraph 48, after deducting any ground rent or other charges, administration costs and any expenses borne by the institution necessary to keep the land and buildings in a fit state to command that rent.

    Transfers

53. The institution may transfer its title to, or grant an interest or licence in, land and buildings which were acquired or developed wholly or in part using Exchequer funds, provided that one of the following conditions has been satisfied:

    a. The transfer or grant is in accordance with paragraph 46 or paragraph 49.

    b. The transfer or grant is to a subsidiary undertaking and contains a direct covenant by the transferee with the Council that the transferee will observe and perform the conditions in paragraphs 46 to 53 of this memorandum. That covenant must be guaranteed by the institution, which must notify the Council within 15 working days of the transfer or grant to the subsidiary.

    c. The institution has the prior written consent of the Council to the transfer or grant. The Council may attach conditions to such consent.

    Application of Section 69(4) of the 1992 Act

54. Exchequer funds may have been provided directly by the Department for Education to the institution or to the trustees or the providing body of a former voluntary or direct grant college. In such cases, the Secretary of State has, under section 69(4) of the 1992 Act, directed the Council to be his agent in enforcing the same conditions as those in paragraphs 46 to 53 above, relating to the disposal of assets and the use of such assets as security for borrowing.

    Financial commitments

    Financial commitments include finance leases, as defined in SSAP 21 'Accounting for leases and hire purchase contracts' and other schemes where borrowing is the substance of the transaction, in line with FRS 5 'Reporting the substance of transactions'. This definition will be revised when the Accounting Standards Board issues its revised standard on accounting for leases.

55. It is the Council's responsibility to protect the public investment in institutions. To help to fulfil this responsibility, and in its role of monitoring financial health, the Council will require the institution to satisfy certain conditions relating to long-term and short-term financial commitments. These conditions are set out below with further details in Appendix 1 of this financial memorandum. These conditions are no more than the Council would expect the institution to be able to demonstrate in all cases, irrespective of whether Council consent is being sought.

    Long-term financial commitments

    Long-term financial commitments mean amounts which are due for payment after more than 12 months, in accordance with GAAP.

56. The conditions that the Council requires to be satisfied when an institution undertakes any long-term financial commitment are:
    1. Any new investment should be consistent with the institution's strategic plan and should represent the best value option.
    2. Any new financial commitment, or refinancing arrangement, should be consistent with the institution’s financial strategy and represent best value.
    3. The institution must be able to meet its financial commitments, without recourse to additional grant from the Council, and its ability to maintain financial and academic viability must not be impaired as a result of its financial commitments.
    4. The institution’s governing body has taken an informed decision regarding any new investment and any new financial commitment or refinancing arrangement.
    5. The institution must notify the Council in writing of the use of any Exchequer-funded asset as security for any financial commitment, within 15 working days of the signing of the commitment.
57. The institution shall obtain written Council consent before it undertakes such a level of financial commitment that the annualised servicing costs of all long-term financial commitments, including loans from the Council, exceed a threshold of 4 per cent of total income, as reported in the latest audited financial statements, or the estimated amount for the current year if that is lower. The annualised servicing costs of the financial commitments consist of the costs of capital repayments and total interest costs spread evenly over the period of the financial commitments.
58. In assessing total long-term financial commitments and total income, all inherited debt and lease payments which isare fully reimbursed by the Council, and all such reimbursements, shall be ignored. The institution shall also ignore any individual lease where the annualised servicing cost is less than or equal to the lower of 0.1 per cent of total income (as defined earlier) or £25,000, provided that the combined annualised servicing costs of such leases do not exceed 0.5 per cent of total income.

    Short-term financial commitments

59. The conditions that the Council requires to be satisfied when an institution undertakes any short-term financial commitment are:
    1. That short-term financing is the most appropriate solution.
    2. The proposed financing arrangement is consistent with the institution’s financial strategy.
    3. The institution’s governing body has taken an informed decision regarding the short-term financing arrangements.
    4. The institution must notify the Council in writing of the use of any Exchequer-funded asset as security for any financial commitment, within 15 working days of the signing of the commitment.
60. The institution shall obtain written Council consent before its negative net cash, as determined on a cash book basis and as defined in FRS 1 (revised 1996): ‘Cash Flow Statements’, exceeds the lower of 5 per cent of total income or £2 million, for more than seven consecutive calendar days.

    Monitoring of estate management and financial commitments

61. The Council will monitor compliance with the requirements in paragraphs 43 to 53 and paragraphs 55 to 60.

    Costing and pricing of activities

62. In determining the price to be charged for the following services, the institution shall assess the full cost of the service to itself:
    • research contracts
    • residences, catering and conferences
    • services to external customers, including consultancy
    • overseas activity.
63. The Council does not expect such activities to be subsidised directly or indirectly from Council funds unless the institution considers it appropriate to do otherwise in the circumstances.

    Financial statements

64. The institution shall keep proper accounting records and shall prepare financial statements in respect of each accounting period. The institution shall provide the Council with three copies of its audited financial statements for the accounting period by 31 December following the end of the accounting period. At least one copy of the financial statements provided to the Council shall contain the signatures required under paragraph 67 of this memorandum, and shall be signed by the institution’s external auditors. The institution shall make reasonable arrangements to make copies of the financial statements publicly available.
65. The institution shall notify the Council of any event that has, or is likely to have, a material adverse impact on the financial position of the institution, as soon as this becomes apparent.
66. The institution shall ensure its financial statements comply with the Accounts Direction issued from time to time by the Council. The Direction will cover what information is to be in the financial statements, how they are to be presented and the methods, and principles for preparing them in accordance with GAAP.
67. The financial statements shall be signed by the designated officer and by the chairman or one other member of the governing body appointed by that body. If the institution is a company limited by guarantee, the requirements of the Companies Act 1985 (as revised by the Companies Act 1989) for signatories to the financial statements shall apply.

    Audit

68. The governing body of the institution shall appoint an audit committee, and arrange to provide for internal and external audit, in accordance with the Council’s Audit Code of Practice (HEFCE 98/28) and any other directions drawn up and published by the Council in consultation with institutions. Any requirements mandatory under the Audit Code of Practice shall be a condition of grant under this memorandum.
69. The Council's Audit Service will, from time to time, evaluate the institution's internal control and governance arrangements.
70. It may also carry out any additional investigations that it considers necessary. All or part of the cost of such additional investigations may, where circumstances warrant it, be deducted from the institution's recurrent grant.
71. The institution shall provide the Council's Audit Service with access to all books, records, information and assets. The Audit Service can require any officer to give any explanation which it considers necessary to fulfil its responsibilities. The books and records of the institution shall also be open to inspection by the Comptroller and Auditor General.
72. The Council may carry out reviews designed to improve economy, efficiency and effectiveness in the management or operation of the institution including value for money studies. The Comptroller and Auditor General may also carry out value for money studies of the institution's use of resources.
73. DfEE internal auditors may accompany the Council's auditors on their visits to the institution. On such visits the DfEE's auditors will be concerned only with the way the Council's auditors are carrying out tasks, and will not themselves audit arrangements within the institution.

    Other matters

    Revision

74. After consultation with the institution and such bodies representing the institutions as the Council considers appropriate, the Council may from time to time revise, revoke or add to any of the conditions in Part 1 of this memorandum. The institution may itself make proposals to the Council for such changes. The Council will, from time to time, review the thresholds and monetary limits in paragraphs 22, 57, 58 and 60 of this memorandum to ensure they remain up to date. The Council will consult institutions if it intends to amend these limits.

    Interpretation

75. The rights, powers and remedies reserved to the Council in this memorandum are in addition to any other rights, powers and remedies which it may hold now or at any time in the future. No failure to exercise or delay in exercising on the part of the Council any of its rights, powers and remedies shall operate as a waiver of them. Nor shall any single or partial exercise of any such right, power or remedy preclude any further or other exercise of the same or any other right, power or remedy.
76. Questions on the interpretation of any statement in this memorandum shall be resolved by the Council after consultation with the institution, and such bodies representing the institutions as the Council considers appropriate.

    Effective date

77. This memorandum shall take effect from 1 August 2000.

    Signature of the designated office holder

78. The designated office holder of (name of institution) should signify below that they have received the financial memorandum, which sets out the terms and conditions for payment by the Higher Education Funding Council for England of funds to the governing body of (name of institution), out of funds made available by the Secretary of State for Education and Employment.

Appendix 1

Disposal of an Exchequer-funded asset

Financial commitments

Appendix 2

Areas where prior Council consent is required

1. The Council’s prior written consent is required if the institution wishes to:

   a. Transfer its title to, or grant an interest in, an Exchequer-funded asset, where the transfer is neither a sale nor lease for full value and is not to a subsidiary undertaking (paragraph 53). (Unless otherwise indicated, all references are to paragraphs in the model financial memorandum.)

   b. Undertake such a level of financial commitment that the annualised servicing costs of all long-term financial commitments exceed a threshold of 4 per cent of total income (paragraph 57).

   c. Allow its negative net cash or cash equivalents to exceed a threshold of the lower of 5 per cent of total income or £2 million for more than seven consecutive days (paragraph 60).

2. The Council will endeavour to respond to a request for consent, which must be signed by the Director of Finance or equivalent officer, within 15 working days of receiving all the relevant information as listed in this Appendix. However, requests for consent which would take an institution’s annualised servicing cost for long-term financial commitments above 7 per cent will require Board approval. (Board meetings are normally held in January, February, April, June, September, November and December.) Institutions should take account of this timescale in planning activities where Council consent is required. However the Council recognises that exceptional circumstances may arise which would require a faster response to paragraph 1c above.

   Transfer of an Exchequer-funded asset

3. Paragraph 53 allows the institution to transfer its title to, or grant an interest in, Exchequer-funded land and buildings where the transfer is neither a sale nor lease for full value (as defined in paragraphs 46 and 49) and is not to a subsidiary undertaking, provided that the institution has the Council's prior written consent to the transfer or grant. Paragraph 53 also states that the Council may attach conditions to such consent.
4. In considering requests for consent to transfer an Exchequer-funded asset, the Council's main aim is to ensure that the Exchequer interest in the asset is not put at risk.
5. In considering requests for consent to transfer an Exchequer-funded asset, the Council will require:

   a. Identification and valuation of the Exchequer-funded asset transferred. (Throughout this appendix, all references to ‘valuation’ mean a valuation in accordance with the 'Royal Institute of Chartered Surveyors Appraisal and Valuation Manual'.) b. Calculation of the Exchequer interest in the asset. c. The reasons for the decision to transfer the asset to a third party. If the transfer is part of a larger arrangement then details of this arrangement and how it will operate must be included, with a statement of associated risks and how they have been mitigated. d. Details of legal arrangements to be put in place by the institution to ensure that the Exchequer interest will be protected. e. Written acceptance by the institution of the condition that if the Exchequer interest in the asset is lost or reduced (other than because of movements in market values), then the Council will be entitled to withhold grant until a sum equal to the value of the Exchequer interest lost has been repaid. f. Details of the decision-making body which took the decision to transfer the Exchequer-funded asset to the third party, and the date of the relevant meeting.

   Consent to exceed the threshold for long-term financial commitments

6. Paragraph 56 specifies the conditions which the Council requires the institution to satisfy when undertaking any long-term financial commitment.
7. Paragraph 57 states the circumstances in which written Council consent is required before the institution undertakes long-term financial commitments. The requirements of paragraph 57 will only operate when the institution intends to take out additional financial commitments, including loans from the Council, or to refinance existing financial commitments, such that the annualised servicing costs of total borrowings exceed the threshold of 4 per cent of total income. (This also applies to any threshold other than 4 per cent for which the institution has the Council’s prior written consent.) Where the only cause of the institution exceeding the 4 per cent threshold is an increase in the interest rate(s) on variable rate borrowings, or a reduction in the institution’s income, there is no need to seek Council consent. Appendix 4 provides guidance on how to calculate the annualised servicing cost.
8. Financial commitments include:
   • all borrowing, whether self-financing or not
   • finance leases, subject to the exclusion in paragraph 58
   • all inherited debt and leases which are not fully reimbursed by the Council
   • PFI arrangements which are accounted for as loans or finance leases in accordance with the requirements of SSAP 21 or FRS 5.
9. In considering requests for consent to exceed the threshold for long-term annualised servicing costs, the Council will require the institution to satisfy the conditions set out in paragraph 56, by submitting the information specified below. This information is similar to that which the Council would expect to have been provided to the institution’s own decision-making body.

   Condition 1	Any new investment should be consistent with the institution's strategic plan and represent the best value option.
   Information required:	Description of the activity requiring new investment. Demonstration of where such activities fit into the institution’s strategic plan and supporting strategies. Confirmation that the Council’s guidance on appraising investment decisions, including a full assessment of the key risks and uncertainties of the activity, has been followed. (A list of relevant HEFCE guidance is at the end of this section.) A list of the range of options considered, the net present value (NPV) of each option appraised and a brief commentary explaining why the preferred option has been selected.
   Condition 2	Any new financial commitment, or refinancing arrangement, should be consistent with the institution’s financial strategy and represent the best value.
   Information required:	The reasons why additional long-term finance, or refinancing, is necessary and how this fits with the institution’s financial strategy. The forms of finance or procurement which have been considered and the process and criteria for selecting the best value method. The NPV for each of the financing options appraised and a brief commentary explaining why the preferred option was selected. Details of the preferred financing option, including the name of the lender, the principal sum to be borrowed, the period of the borrowing and the basis of repayment. The terms and conditions of the preferred financing option (a copy of the term sheet would satisfy this requirement) and an evaluation of the risks and uncertainties of this option.
   Condition 3	The institution must be able to meet its financial commitments, without recourse to additional grant from the Council, and its ability to maintain financial and academic viability must not be impaired as a result of its financial commitments.
   Information required:	The impact of any new activity and evidence to demonstrate that the proposed new financial commitment or refinancing arrangement is affordable. This should be presented in the context of the latest financial forecasts submitted to the Council, updated for any material changes. Details of any significant changes to the financial commitments or guarantees from those disclosed in the institution’s most recent audited financial statements. (This will cover: finance and operating leases under SSAP 21: ‘Accounting for leases and hire purchase agreements’; PFI schemes where the substance of the transaction is not borrowing under FRS 5: ‘Reporting the substance of transactions’; or as required by the Council’s Accounts Direction to higher education institutions) Guarantees made on behalf of entities that are not consolidated into the institution's financial statements.
   Condition 4	The institution’s governing body has taken an informed decision regarding any new investment and any new financial commitment or refinancing arrangement.
   Information required:	The decision-making body involved and the date the decision was made. The basis on which it reached its decision.
   Condition 5	The Council must be notified in writing of the use of an Exchequer-funded asset as security for any financial commitment, within 15 working days of the signing of the commitment.
   Information required:	Identification and valuation of any Exchequer-funded assets to be used as security.
   Threshold	Setting the new threshold for long-term financial commitments.
   Information required: (a template to record this information can be downloaded) [ MS Excel 27K | Zipped Excel 8K ] (added 26 April 2002)	A list of existing/continuing financial commitments (including the lender, term and annualised servicing costs) and details of the annualised servicing costs of the new financial commitment. Identification of the proportion of each commitment that relates to activities which should recover their full economic cost. Calculation of the threshold required based on total income as recorded in the latest audited financial statements.

    

   HEFCE guidance documents

   • Guide for Members of Governing Bodies of Universities and Colleges in England, Wales and Northern Ireland. (98/12)
   • Strategic planning in higher education (00/24)
   • Effective financial management in higher education (98/29)
   • Financial strategies – consultation draft due to be published Summer 2000
   • Estate strategies: guide to good practice (00/04)
   • Appraising investment decisions (99/21)
   • Practical guide to PFI for higher education institutions (98/69)

   Consent to exceed the threshold for short-term financial commitments

10. Paragraph 59 specifies the conditions which the Council requires the institution to satisfy when undertaking any short-term financial commitment. Paragraph 60 states the circumstances in which prior written Council consent is required for short-term financial commitments.
11. In considering such requests, the Council will require the institution to satisfy the conditions set out in paragraph 59, by submitting the information specified below. This information is similar to that which the Council would expect to have been provided to the institution’s own decision-making body.

    Condition 1	That short-term financing is the most appropriate solution.
    Information required:	Details of the circumstances that have led to the need for increased short-term finance.
    Condition 2	The proposed financing arrangement is consistent with the institution’s financial strategy.
    Information required:	How the decision to take out increased short-term finance fits with the institution’s financial strategy. The forms of finance considered and the factors that have been taken into account in selecting the preferred option. Details of the preferred financing arrangement, including the name of the lender, the principal sum to be borrowed, the period of loan and the basis of repayment. The terms and conditions of the financing arrangement (a copy of the term sheet would satisfy this requirement).
    Condition 3	The institution’s governing body has taken an informed decision regarding the short-term financing arrangements.
    Information required:	The decision-making body involved and the date the decision was made. The basis on which it reached its decision.
    Condition 4	The Council must be notified in writing of the use any Exchequer-funded asset as security for any financing arrangement, within 15 days of the of the signing of the commitment.
    Information required:	Identification and valuation of any Exchequer-funded assets to be used as security for the short-term facility.
    Threshold	Setting the new threshold for short-term financial commitments.
    Information required:	The revised threshold required (in £s) and the period for which the increased threshold is required. Cashflow forecasts which demonstrate the need for the increased threshold.

Appendix 3

Decision-making delegated to the institution

1. In exercising a delegated responsibility, the institution must comply with this financial memorandum and have regard to any relevant Council guidance. Where required the Director of Finance, or equivalent officer, of the institution must inform the Council, in writing, when such decisions have been taken.
2. The Council will assess how the institution has exercised its delegated decision-making powers, probably on a sample basis. Therefore the institution is expected to have sufficient information available to demonstrate that it has taken decisions in compliance with this financial memorandum.
3. The Council has delegated to the institution the ability to:

   a. Sell an Exchequer-funded asset (paragraph 46).

   b. Retain the proceeds from the sale of an Exchequer-funded asset (paragraph 47).

   c. Grant a lease or licence over an Exchequer-funded asset (paragraph 49).

   d. Retain the rental proceeds from the grant of a lease or licence over an Exchequer-funded asset (paragraphs 50-51).

   e. Transfer an Exchequer-funded asset to a subsidiary undertaking (paragraph 53b).

   f. Borrow or refinance existing long-term financial commitments where the annualised servicing costs are below the threshold (paragraph 57).

   g. Borrow on a short-term basis below short-term borrowing thresholds (paragraph 60).

   Sale of an Exchequer-funded asset

4. Paragraph 43 states the institution's general responsibility for estate management.
5. Paragraph 46 delegates to the institution the ability to sell an Exchequer-funded asset, provided that all the conditions in that paragraph are satisfied.
6. The institution must submit the following information, to the Council, in writing within 15 working days of the exchange of contracts for the sale of an Exchequer-funded asset:

   Identification of the Exchequer-funded asset sold and the agreed sale price. Calculation of the Exchequer interest in the asset sold. Confirmation that the proceeds will be spent within three years of the receipt of the sales proceeds, or three months after the exchange of contracts for the sale, whichever is the earlier.

7. The institution must have the following information available to demonstrate that it has complied with this financial memorandum:

   Paragraph 46 A copy of the independent professional advice. A justification of the decision that the terms and conditions under which the sale is proposed are the best that can reasonably be obtained for the institution at that time. (The Council would normally expect this condition to be satisfied by provision of the papers submitted to the institution’s decision-making body.) Paragraph 43 An explanation of how the institution has had regard to the relevant parts of the Council’s estate procedures.

   Retention of the proceeds from the sale of an Exchequer-funded asset

8. Paragraph 47 delegates to the institution the power to retain the proceeds from the sale of an Exchequer-funded asset, provided that all the conditions in that paragraph are satisfied. Paragraph 48 states the amounts to be paid to the Council where the conditions under paragraph 47 are not satisfied.
9. When an Exchequer-funded asset is sold, the institution is required to reinvest both the proceeds and the accrued interest in line with paragraph 47.
10. The institution must submit the following information, to the Council, in writing within 15 working days of the date the proceeds were reinvested:

    The amount of the proceeds reinvested. Identification of the Exchequer-funded asset whose sale generated the proceeds. Confirmation that the sale proceeds have been reinvested within three years of the receipt of the sale proceeds or three months after the exchange of contracts for the sale, whichever is earlier.

11. The institution must have the following information available to demonstrate that it has complied with the financial memorandum:

    Paragraph 47 Details of the asset or assets into which the proceeds have been reinvested, showing that the proceeds have not been reinvested into assets that are used primarily for: research contracts residences, catering and conferences services to external customers, including consultancy overseas activities. Where the expenditure is on an estates project, an explanation of how the activity fits with the institution’s estate strategy, and how the institution has had regard to Council guidance on appraising investment decisions. (The Council would normally expect conditions a. and b. to be satisfied by provision of the papers submitted to the institution’s decision-making body.) Paragraph 43 a. An explanation of how the institution has had regard to the other relevant parts of the Council’s estate procedures.

12. If the institution wishes to apply the proceeds from the sale of an Exchequer-funded asset on servicing payments under a PFI/PPP activity, and this would not result in the reinvestment being made within three years or would not recreate an Exchequer interest in another asset, the institution should contact the Council to discuss how to proceed.

    Grant of a lease or licence over an Exchequer-funded asset

13. Paragraph 49 delegates to the institution the power to grant a lease or licence over an Exchequer-funded asset, provided that all the conditions in that paragraph are satisfied.
14. The institution must submit the following information, to the Council, in writing within 15 working days of the execution of the lease or licence:

    a. Identification and valuation of the Exchequer-funded asset over which a lease or licence has been granted. b. Calculation of the Exchequer interest in the asset.

15. The institution must have the following information available to demonstrate that it has complied with the financial memorandum:

    Paragraph 49 a. A copy of the independent professional advice. b. A justification of the decision that the terms and conditions under which the lease is proposed are the best that can reasonably be obtained for the institution at that time. (The Council would normally expect this condition to be satisfied by provision of the papers submitted to the institution’s decision-making body.) Paragraph 43 a. An explanation of how the institution has had regard to the relevant parts of the Council’s estate procedures.

    Retention of the rental income from a lease or licence over an Exchequer-funded asset

16. Paragraph 51 allows the institution to retain the income from the lease of an Exchequer-funded asset provided that both the conditions in that paragraph are satisfied.
17. Paragraph 50 states that where the consideration for the granting of the lease or licence includes the payment of a premium, that premium shall be treated as sale proceeds and the institution must apply the requirements of paragraph 47 to its reinvestment. If the consideration also includes periodic payments of rent during the life of the lease or licence, these shall be treated as rental income and paragraph 51 shall apply to their use by the institution.
18. The institution must submit the following information, to the Council, in writing within 15 working days of the date the proceeds were first reinvested:

    a. The amount of the rental income to be reinvested. b. Identification of the Exchequer-funded asset over which a lease or licence was granted.

19. The institution must have the following information available to demonstrate that it has complied with the financial memorandum:

    Paragraph 50 a. A copy of the rental agreement, showing whether part or all of the consideration for the granting of the lease or licence is the payment of a premium. Paragraph 51 a. Details of the activities into which the rental income has been reinvested, showing that the investment is not primarily into activities which should recover their full economic costs. (The Council would normally expect this condition to be satisfied by provision of the papers submitted to the institution’s decision-making body.) Paragraph 43 a. An explanation of how the institution has had regard to the relevant parts of the Council’s estate procedures.

20. Where the consideration for the granting of the lease or licence includes the payment of a premium, and the institution wishes to apply this to servicing payments under a PFI/PPP activity, the institution should contact the Council to discuss how to proceed.

    Transfer of an Exchequer-funded asset to a subsidiary undertaking

21. Paragraph 53b allows the institution to transfer an Exchequer-funded asset to a subsidiary undertaking, provided that the transfer contains a direct covenant by the transferee with the Council that the transferee will observe and perform certain conditions in the financial memorandum, and that covenant is guaranteed by the institution.
22. The institution must submit the following information, to the Council, in writing within 15 working days of the transfer:

    a. Identification and valuation of the Exchequer-funded asset to be transferred. b. Calculation of the Exchequer interest in the asset. c.Confirmation that the transfer is to a subsidiary undertaking and the name of that subsidiary undertaking. d. Confirmation that the transfer contains the covenant and guarantee required by the financial memorandum.

23. The institution must have the following information available to demonstrate that it has complied with the financial memorandum:

    Paragraph 53 a. A copy of the covenant ensuring that the subsidiary undertaking will observe and perform the conditions in paragraphs 46 to 53 of the financial memorandum. b. A copy of the guarantee from the institution that it will remain liable to the Council for the Exchequer interest in the asset transferred. c. The Council would normally expect that the papers submitted to the institution’s decision-making body, including a justification of the decision to transfer the asset to a subsidiary undertaking, would also be available. Paragraph 43 a. An explanation of how the institution has had regard to the relevant parts of the Council’s estate procedures.

    New or revised financial commitments below the thresholds for long-term or short-term financial commitments

24. Paragraphs 56 and 59 specify the conditions which the Council requires the institution to satisfy when undertaking both long-term and short-term financial commitments respectively.
25. If any financial commitment is secured on an Exchequer-funded asset, the institution must submit to the Council the following information within 15 working days of the signing of the contracts for the financial commitment:

    a. Identification and valuation of any Exchequer-funded asset used as security. b. Calculation of the Exchequer interest in that asset.

26. When it has undertaken new or revised long-term financial commitments, the institution must be able to satisfy the Council that it has acted in accordance with paragraph 56. One way of doing so is to have available all the information listed in paragraph 109 of Appendix 2. When it has undertaken short-term borrowing or refinancing, the institution must be able to satisfy the Council that it has acted in accordance with paragraph 59. One way of doing so is to have available all the information listed in paragraph 1211 of Appendix 2.

Appendix 4

Clarification of annualised servicing cost (ASC) calculations

1. Paragraph 57 of the financial memorandum defines the ASC as follows:

   ‘The annualised servicing costs of the financial commitments consist of the costs of capital repayments and total interest costs spread evenly over the period of the financial commitments.’

   For the purpose of calculation, this means the total expected net cash payments (capital and interest) over the period of the loan, divided by the period of the loan in years.

2. Where fixed interest rate arrangements are in place, these rates should be applied for the term of the commitment. In other circumstances, the rate currently payable should be applied.
3. Examples of the different types of financial instrument are outlined below.
4. In the case of deferred repayments or a repayment holiday, the period of the commitment is defined as starting at the point of the draw-down (or first point if in tranches) and ending when any liability concerning the commitment is fully extinguished.
5. Paragraph 58 of the financial memorandum states:

   ‘In assessing total long-term financial commitments and total income, all inherited debt and lease payments which are fully reimbursed by the Council, and all such reimbursements, shall be ignored.’

   For the purpose of calculation, this means that any inherited debt reimbursements should be excluded from the long-term financial commitments, and the interest element should be excluded from total income. Similarly, lease payments and leases that have been converted into mortgages should be excluded from the calculations to the extent that they are reimbursed by the Council.

   Inherited liabilities rolled into core funding

6. Where inherited liability reimbursements have been rolled into core funding these are no longer reimbursable by the Council. Therefore, local authority debts which are no longer reimbursed should be included as long-term financial commitments in calculating the institution’s ASC, and no adjustment should be made to total income.

   Categories of institutional financial commitments

7. For the purposes of calculating the ASC of financial commitments, it is worthwhile categorising some of the different types of financial instrument currently in use, and outlining which figures should be used for calculation.

   Category 1: Simple mortgages and loans

8. The principle here is that the institution borrows a capital sum and undertakes to repay the loan over a predetermined period. Repayments may be by equal instalments, annuity based or other varying instalments, or there may be a capital and/or interest ‘holiday’. Additionally, the interest rate may be fixed or variable or a combination of the two. In all cases, the ASC is the total cash payments, divided by the original period (in years) of the loan. Where the interest rate is known, or payments have already been made, these figures should be used. If the interest rate is variable, the rate (or rates where more than one rate applies) currently payable should be used for the balance of the loan period.

   Category 2: Secured, cash-backed borrowing

9. Examples of this type of scheme are bonds, or debenture issues. In these cases, the repayment of the financing generally takes place through cash deposits into a designated account, which provides the majority (if not all) of the funds to repay the financing on the settlement date. Depending on the type of scheme, the settlement date may be predetermined, or there may be various dates on which an institution can exercise an option to settle. It is up to each institution to decide upon the most likely settlement date and calculate the ASC accordingly. In these instances, the ASC is the aggregate sum payable into the designated account (plus any other account required to top up the designated account), divided by the term of the financing, plus any interest or rent that may be payable each year. With these types of scheme, rates of interest/rent are often fixed in advance. If this is not the case, the rates currently payable or paid should be used in the same way as for category 1 loans.
10. In certain instances, part of the initial receipts from financing are used to create a sinking fund, designed to provide sufficient funds to repay the debt at a predetermined time. In these instances, the financing should be excluded from the ASC calculation, to the extent that it is fully covered by the sinking fund, provided that the sinking fund cannot be used for any purpose other than redeeming the financing.

    Category 3: Finance leases

11. This financial memorandum specifically includes finance leases as defined in SSAP 21, ‘Accounting for Leases’. The first step is to establish what type of lease is under consideration:

    a. A standard lease, where the asset was not previously owned by the institution.

    b. Sale and leaseback of existing assets.

    c. Lease and leaseback of existing assets.

12. For ASC purposes, the treatment of items a. and b. is identical. The ASC consists of the total of the cash amounts payable under the terms of the lease, divided by the original length of the lease (in years).
13. An added complication arises with item c. above, as the institution receives rental income that is inextricably linked to rental expenditure. In this instance, the ASC should be calculated on the net cash outflow.

    Summary

14. In each of the above cases, the essential element in calculating the ASC is the inclusion of all cash payments that will be or have been made in servicing and redeeming the financing, even if a large lump sum is paid at the end of the term. Having established the total cash outflow, it should be divided by the original term of the loan, to arrive at the ASC. If interest rates are fixed, they should be used. In other circumstances, the rate (or rates if there is more than one) currently payable should be applied to future payments. In all cases, the calculation of the ASC should reflect economic substance, which may not mirror the legal form.

    Changes to a scheme

15. If a financing scheme is to be shortened or extended, the ASC calculation needs to be reworked using the amended finance term and rates of interest. If the recalculation results in an ASC higher than the threshold currently permitted (or 4 per cent if no specific threshold exists), prior written consent for amendments to the scheme must be sought from the Council in accordance with Appendix 1.

Appendix 5

Scope of the financial memorandum

This appendix shows which paragraphs apply to institutions for whom the Council, the TTA and the FEFC have lead accountability.