Dear Vice-Chancellor or Principal
Annual accountability return requirements: Financial forecasts submission
1. This letter clarifies our requirements for the submission of financial forecasts and commentary as part of our annual accountability return requirements.
2. A response is required from all higher education institutions by 1700 on Friday 31 July 2015. We will send detailed guidance on changes to the tables and how to access and submit the financial forecast tables directly to heads of finance by mid-April.
3. Institutions are asked to submit full financial forecasts for the three academic years from 2015-16 to 2017-18, and to update the 2014-15 forecasts submitted in July 2014. These should take into consideration our recent grant announcements and any other information that the institution considers pertinent.
4. There are minimal changes to the format of this year’s forecast tables, as we will be moving to financial forecasts based on the new Statement of Recommended Practice (SORP) from July 2016. The proposed approach for transition to the new SORP may be found in ‘HEFCE financial returns: Transition to the new SORP’ (HEFCE Circular letter 02/2015).
Financial commitments threshold
5. A table is included in the financial forecasts which will automatically calculate your institution’s average earnings before interest, taxes, depreciation and amortisation (EBITDA) over the period of the forecast, although you should check this calculation for accuracy. This average is multiplied by five to arrive at your institution’s financial commitment threshold. Below the threshold calculation, institutions should complete the box showing the value of outstanding financial commitments (including all long-term and short-term commitments on the balance sheet) as of 31 July 2015, plus any undrawn facilities agreed with lenders.
6. Where an institution plans to increase its commitments beyond its calculated threshold or higher threshold as of 31 July 2015, it should apply to have a revised financial commitment threshold approved, in accordance with Memorandum of Assurance and Accountability (HEFCE 2014/12).
7. We request that institutions include future financial commitments in their forecasts and forecast commentary as far as possible, and check Table 7 of the financial forecasts tables to ensure that the borrowing information is accurate up to 31 July 2015.
8. We recognise that the new SORP will have an impact on EBITDA and balance sheet financial commitments from 2015-16, and we will work with institutions and the British Universities Finance Directors’ Group to understand the impact better, so that the EBITDA threshold remains appropriate. Financial forecast commentary
Financial forecast commentary
9. In the commentary that accompanies the financial forecasts, respondents must answer the following questions, as listed in Annex D of ‘Annual accountability returns 2014’ (HEFCE 2014/20):
- Explain how the institution is ensuring its sustainability, including through its strategy, quality of teaching and research, management of key risks including cash flow management, proposed financial commitments or material leases, and investment in estates and infrastructure. Set out any conclusions from sustainability reviews as expected by the Financial Sustainability Strategy Group and any going concern reviews.
- Explain the assumptions about student recruitment and fee income over the period of the forecasts, including how the institution is mitigating any risk and what scenario planning or sensitivity analysis has been undertaken.
- Explain significant movements (±10 per cent in any one year) in the income and expenditure account, and material changes on the balance sheet (including the detail of any material exceptional items). In particular, provide an explanation for material increases in staff costs or numbers.
- Explain the key assumptions made in developing the financial forecasts.
10. We expect the commentary to explain any significant differences between the 2014-15 projected outturn and that submitted in July 2014.
11. We expect the financial forecast submission to have been approved by the governing body.
12. If issues are raised that materially affect an individual institution’s future financial sustainability, in its forecasts or at any other time in the year, this may lead to a review of the institution’s risk status and a revised risk letter.
13. We will issue guidance about the annual accountability returns process for December 2015 at the end of September.
Professor Madeleine Atkins