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 noon on Friday 29 July 2016. We will send guidance on how to access, complete and submit the financial forecast tables directly to heads of finance.
3. For all institutions the new financial reporting standard (FRS 102) and the new Statement of Recommended Practice (SORP) for higher and further education apply from 1 August 2015. There are some additional requirements for this year’s forecast submissions to cover the transition to the new SORP, so that the impact on the financial indicators can be understood. These changes are detailed in paragraphs 9 and 11 to 13.
4. Institutions are asked to submit forecasts covering:
- restated 2014-15 figures
- 2015-16 projected outturn
- 2016-17, 2017-18 and 2018-19 forecasts.
5. The forecasts should take into consideration our recent grant announcements and any other information that the institution considers pertinent.
6. The financial forecast submission must be approved by the governing body.
7. We sought financial forecast information prepared under the new SORP on a voluntary basis at the end of March. This was to test an approach to the financial commitment threshold which used adjusted operating cash flow to replace earnings before interest, tax, depreciation and amortisation (EBITDA) as the basis for the threshold. However, due to the relatively small sample of information collected we cannot, at this stage, complete comprehensive modelling to confirm the appropriateness of this approach.
8. Therefore, we will collect EBITDA and adjusted operating cash flow information in the July forecasts to help us complete modelling to determine a new approach to financial commitments which we expect to introduce from 1 August 2017. Higher education institutions’ existing financial commitment thresholds, based on the July 2015 forecasts or any increased threshold agreed by HEFCE since the forecast, will be extended until 31 July 2017 while we undertake modelling. Any increase in financial commitments due to a change of treatment under the new SORP will be accommodated under a higher threshold if required.
9. To help improve the accuracy of information on financial commitments and the consistency of information provided, we have made changes to the financial commitments table (formerly Table 7, now Table 6) in the financial forecast tables, which institutions will need to complete in full. Completing this table accurately will help us to understand the impact of the new SORP and to set an appropriate financial commitment threshold.
Financial forecast commentary
10. In the commentary that accompanies the financial forecasts, respondents must answer the following questions:
- 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 and 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 consolidated statement of comprehensive income and expenditure, and material changes on the consolidated balance sheet. In particular, provide an explanation for material increases in staff costs or numbers.
- Explain the key assumptions made in developing the financial forecasts.
These questions were previously listed in Annex D of ‘Annual accountability returns 2015’ (HEFCE 2015/16) and have been updated in this letter to reflect the accounting terminology used in the new SORP.
New FRS102 accounting standard and new SORP
11. As noted above, institutions are asked to submit restated 2014-15 figures within the financial forecast table. We expect the financial forecast commentary to include information on the restated 2014-15 figures and the effects of the new SORP, where these represent significant movements. Where available we are asking institutions to provide information on their transition to the new SORP, such as copies of their draft transition statement or internal papers.
12. An additional tab in the financial tables contains a brief survey to assist us in understanding, at a summary level, the materiality of the main changes arising from the introduction of FRS102. We expect a variety of changes compared with the previous SORP, and we believe that consistently collecting this information across the sector will assist HEFCE in analysing the financial information returned.
13. We also note that under the new SORP, institutions may wish to include separate lines on the statement of comprehensive income and expenditure where relevant for understanding financial performance, such as for ‘exceptional items’ which are no longer defined in the new SORP. We have not included additional lines in the financial forecast tables for this purpose and ask that institutions include additional narrative around any material items in the commentary.
14. If issues are raised that materially affect an individual institution’s 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.
15. We will issue guidance about the annual accountability returns process for December 2016 at the beginning of September.
Professor Madeleine Atkins