University of Leeds€¦ · • Final standards – Segment reporting (4th quarter) – Share based...

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Accounting update.Accounting developments in the HE sector

University of Leeds

Monday 4th December

An overview of key trends2 ©2006 Deloitte Touche Tohmatsu

The small print!

© Deloitte & Touche LLP 2006: This seminar has been written in general terms and therefore cannot be relied on to cover specific situations. Applications of the principles set out will depend on the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this seminar. We would be pleased to advise you on the application of the matters covered at the seminar to your specific circumstances. Deloitte & Touche LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this seminar.


Your speaker today

• Tony Firth

Director in Leeds Audit Practice, specialising in HE and Financial Services.


Today’s agenda

• The big picture of accounting

• UK Accounting update

• Pensions update (including FRS 17)

• Narrative reporting update

• Sector Specific issues - HEFCE agenda

- Difficult areas

• Deloitte e-room


Accounting – the big picture


Overview of accounting integration

• The University accounts under the HE SORP (based on UK GAAP)

• Subsidiaries account under UK GAAP

• Though the expectation remains that UK GAAP will converge with IFRS, there has recently been a marked slow down in the convergence of UK GAAP with IFRS.

• Initially it was understood that all firms would be required to adopt FRS 26 (IAS 39 – UK equivalent standard for periods ending after January 2007) but following a cooling of attitudes, convergence is now largely on hold until probably at least 2009.

• Potentially there could be a three tier system – IFRS for Plcs and Public Interest entities (not defined)

– ‘IAS Lite’ for Large Private companies

– New FRSEE for smaller entities.

• Still all up in the air!


Recent activity

Standards IFRS UKFinancial instruments: disclosures IFRS 7 FRS 29

Exposure DraftsVesting conditions and cancellations ED (IFRS 2) ED (FRS 20)

Operating segments ED 8 --

Performance reporting (part A) ED (IAS 1) --

InterpretationsMembers shares in co-operatives.. IFRIC 2 UITF 39

Revenue recognition -- UITF 40

Scope of IFRS 2 IFRIC 8 UITF 41

Reassessment of embedded derivatives IFRIC 9 UITF 42

Group and treasury share transactions D17 Info/s 77

Interim reporting and impairment D18 --

Service concessions D12-14 --

Update


IASB projected output

• Final standards– Segment reporting (4th quarter)

– Share based payment: vesting conditions and cancellations (4th quarter)

• Exposure drafts– Borrowing costs (2nd quarter)

– Conceptual framework – part 1 of 8 (2nd quarter)

– Financial instruments puttable at fair value (2nd quarter)

– Earnings per share: treasury stock method (2nd quarter)

– Income taxes (3rd quarter)

– Fair value measurement guidance (3rd quarter)

– SMEs (3rd quarter)

– First time adoption: cost of investment in subsidiaries (3rd quarter)

– Joint ventures (4th quarter)

• Discussion papers– Revenue recognition (4th quarter)

– Insurance contracts (4th quarter)

Update


UK standards: effective dates

• UK standards fully effective in 2005– FRS 17 Retirement Benefits (full implementation)

– FRS 21 Events after the Balance Sheet Date

– FRS 25 Fin. instruments: presentation

– FRS 27 Life Assurance

– FRS 28 Corresponding amounts

• UK standards fully effective 2006– FRS 20 share-based payments

Reminder


Some implementation issues- share based payments- debt/equity classification- pensions


Share-based payments

• Reminder:– IFRS 2 applies to IFRS preparers

– FRS 20 fully effective for 2006 (supersedes UITF 17)

• Charge in P&L account– For services received

– Based on grant date fair value

• Not applicable to University

All companies: mandatory for

2005 or 6


Financial instruments:classification

• Reminder:– IAS 32 applies to IFRS preparers

– FRS 25 part 1 applies to all UK preparers

• Covers– Classification of debt / equity

– Compound financial instruments

– Treasury shares

– Offset rules

• Not applicable to the University as no preference shares, may need to consider in some of the subsidiaries depending on structure of funding


2005


Pension accounting

• Reminder:– IAS 19 applies to IFRS preparers

– FRS 17 fully effective for 2005 (supersedes SSAP 24)

• Defined contribution schemes– No change

• Defined benefit schemes– Fully on-balance sheet

– Annual actuarial input required to generate numbers

• Applicable for the first time this year in the Consolidated accounts only


2005


Pension accounting

• FRS 17 – Deficits benchmarking

• We set out below for comparison the FRS 17 deficits disclosed in the latest accounts of a number of non profit organisations and the effect it has had on their unrestricted funds.

Organisation Year end date Net surplus/ (deficit)

£’000s

Unrestricted funds total £’000

Leeds July 2006 4,349 118,307

A July 2006 (9,740) 71,905

B July 2006 (33,150) 112,800

C July 2006 5,435


Pension accounting

• FRS 17 Assumptions - benchmarking

• We set out below assumptions used by those charities

Organisation Year end date

Discount rateInflation Salary increase

PIP increase

Leeds July 2006 5.1% 3.0% 4.0% 3.0%

A July 2006 5.2% 3.1% 4.6% 3.1%

B July 2006 5.0% 3.0% 4.0% 3.0%

C July 2006 5.1% 3.1% 4.6% 2.9%


Pension accounting

• Common problem #1– How does the double entry work?

• Example– Opening pension fund assets 1,000

– Opening pension liability -1,500

– Service cost 100

– Interest cost 120

– Expected return on assets 80

– Contributions paid 150

– Pensions paid 90

– Closing pension assets 1,150

– Closing pension liability -1,600


Pension accounting

Pension Pension P&L STRGL/assets liability a/c SORIE


Pension accounting


Opening balance +1,000 -1,500

Net deficit 500


Pension accounting


Opening balance +1,000 -1,500Service cost -100 +100Interest cost -120 +120Expected return +80 -80Contributions paid +150Pensions paid -90 +90Sub-total 1,140 -1,630

Actuarial gain (bal.) +10 +30 -40Closing balance 1,150 -1,600

Net deficit 450


Pension accounting




Q1 The pensions regulator asks for a special contribution of 200to be paid in the next period. Should we provide for it?


Pension accounting




Q1 The pensions regulator asks for a special contribution of 200to be paid in the next period. Should we provide for it?

A No, since entry for payment is Dr Pension assets, Cr Cash


Pension accounting




Q2 The scheme is closed with no further service accrual. The actuarycalculates the liability at 1,200. What entry is required?


Pension accounting




Q2 The scheme is closed with no further service accrual. The actuarycalculates the liability at 1,200. What entry is required?

A Dr Pension liability 400, Cr P&L a/c 400


Pension accounting




Q3 Pension levy is 15 pa. How is this accounted for?


Pension accounting




Q3 Pension levy is 15 pa. How is this accounted for?A (i) If paid by company, then charge to P&L as operating cost

(ii) If paid by pension fund, either deduct from expected return (annually), or add to pension liability (NPV of future payments)


Multi employer exemptions

• PAS scheme is a multi employer scheme (within the group)• USS scheme is also a multi employers scheme (with other

entities outside of the group)

As the employer's contributions are affected by a surplus or deficit but the employer is unable to identify its share of the assets and liabilities on a consistent and reasonable basis, e.g., contributions are set for the scheme as a whole rather than reflecting the actuarial characteristics of the employees of the individual employer. In this case additional disclosures are required to those normally given for a money purchase scheme, namely:

(i) the fact that it is a defined benefit scheme but that the employer cannot identify its share of the underlying assets and liabilities; and

(ii) any available information about the existence of the surplus or deficit in the scheme and the implications of that surplus or deficit for the employer.


Narrative Reporting Update


What we’re covering….

• Operating and Financial Review (OFR)

• Enhanced Business Review (EBR) in directors’ report

• Statement of info given to auditors

• Liability provisions


OFR - Background

• Requirement for Operating and Financial Review may have been withdrawn – but still seen by many as best practice

• Non quoted company – enhanced directors report (‘EBR’)

• Not for profit sectors – Treasurer’s reports:

– Charities – Yes

– RSL’s - Yes

– HE’s - No

• Historically HE reports have been weak in this area

• SORP working party looking at this

• Plan to be ahead of the game


The organisations vision and values are supported by its strategy and structure

VISION

VALUES

STRATEGIC IMPERATIVES

STRUCTURE & GOVERNANCE

REQUIREMENTS

How do we achieve our

goals?

What structure best supports us?

What is our purpose?

What values guide us?


Key elements of the OFR

Principles

• Purpose - Greater emphasis on matters significant to the entity

• Audience - Focus on matters relevant to the interests of members

• Time-frame - Forward looking orientation

• Content - Should complement as well as supplement

• Comprehension - Should be comprehensive and understandable

• Balance - Both good and bad aspects

• Comparability - Comparable over time


Key elements of the OFR

Disclosure framework

• The nature, objectives and strategies of the business - Operating business and external environment

• Current and future development and performance - Significant development and performance in year

• Resources - Those available and how managed

• Risks and uncertainties - Facing entity and how managed

• Stakeholder Relationships - How they influence the performance

• Financial position - Position at year end

• Cash flows - During the year and requirements to fund growth

• Liquidity - Level of borrowings and future requirements


Enhanced Business Review (EBR)


Directors’ Report – content (s234ZZB CA85)

Small Medium Others

• Existing requirements

• Business review (EBR)– Fair review of the business

– Principal risks and uncertainties

• Review must be balanced andcomprehensive

• Include financial KPIs1

• Include non-financial KPIs1&2 (incl.info on environment/employees)

1 to extent necessary for an understanding of the development, performance or position of the business of the company

2 where appropriate


EBR - The Current Situation

• EBR mandatory for ALL companies (except small) for periods commencing on or after 1 April 2005

• Group needs to prepare and include EBR in:– Group directors’ report on consolidated basis

– Each individual subsidiary directors’ report (unless small)

• Key changes (requirements in s234, s234ZZA&B CA85)

– Requirements for business review extended

– Principal risks and uncertainties

– KPIs (far less onerous than OFR)

• Director offence – knowing failure to comply or reckless re compliance

• Auditors – positive statement of consistency with accounts


March 2006 Update

• Full explanation of current situation

• Frequently asked questions

• Illustrative EBR for wholly owned subsidiary

• Illustrative OFR

• Checklists for EBR and OFR


Statement of info given to auditors


Statement of info given to auditors

• New Companies Act requirement for periods commencing on or after1 April 2005 (s234ZA)

• Statement on behalf of each director that there is no relevant audit information of which the auditors are unaware

• Subject to same liability regime as rest of directors’ report

• Deloitte guidance coming out in next CG Update


Some recommended steps

• Inform board, establish process, allocate responsibility

• Identify risk areas

• Ensure sufficient discussions held amongst directors

• Hold early discussions with audit partner

• Request early draft of representation letter

• Consider legal advice

• Document the process


Draft specimen wording

"Each of the persons who is a director at the date of approval of this report confirms that:

(1) so far as the director is aware, there is no relevant audit information of which the company's auditors are unaware; and

(2) the director has taken all the steps that he/she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the company's auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985.”


Sector Specific issues


HEFCE - regulation ‘issues’ round up

• The ‘single conversation’– Regulation efficiency– Financial statements and management letter by 30 November– Forecasts, monitoring statements, corporate planning statement,

HESES form, CVC statement - all to be received by 30 November– HEFCE ‘risk letter’ out by end of January– Likely first year – 2007 (same year as new ‘Charity regulator’ role)– Added pressure to your year end timetable!

• A new Audit Code??• The Financial Memorandum – to change as a result of FRS 17 (around

20 HEIs will go into deficit as a result of FRS 17


06/07 Accounts Direction

• 06/07 accounts direction to:

– Remove reference to inherited liabilities

– Recommend corporate governance to follow CUC guidance – HEFCE will ‘look favourably’ on those that comply

– Reporting deadline to be brought forward to 30 November –probably….

– More disclosure of audit and non audit fees


Difficult areas for the sector under discussion


FRS 5 Revenue Recognition

• Application Note G to FRS 5 lays down rules for revenue recognition.

• Care is needed with the key concept of 'right to consideration', which may be easily misinterpreted.

• Potential problem areas:

– HEFCE specific initiative funding

– Some charitable research monies

– HEI electing to allocate a donation as an endowment or crediting it to creditors


UITF 40 Abstract ‘Revenue recognition and service contracts’

Published 10 March 2005

• Where there are distinguishable phases of a single contract it may be appropriate to account for the contract as 2 or more separate transactions provided that the value of each phase can be reliably estimated.

• Contracts for services should not be accounted for as long term contracts unless they involve the provision of a single service or a number of services that constitute a single project

• Under a contract for services that is accounted for as a long term contract, a seller should recognise revenue as contract activityprogresses, in accordance with the stage of completion of its contractual obligations

• The amount of revenue recognised should reflect uncertainties as to the amount the customer will accept and pay

• A contract to provide repetitive services (such as maintenance or cleaning) should not be accounted for as a long term contract


Donations

• Current SORP can be unclear on what is a donation, what’s an endowment and when it should be recognised

• Donations specifically for acquisition of fixed assets – taken to deferred grants when asset is acquired

• Donations with condition that income from investment can be used for specific or general activities

• Donations with no specific terms attached – taken to income and expenditure– But be careful – if the terms are general e.g. to be used for the

Pharmacy department, then take to Income and Expenditure. If specific – to be used for Dr Smith’s work on the effects of global warning on North Devon, then may be restricted and unspent monies may need to be kept on balance sheet


Inalienable assets / Heritage assets

• Common approach is to not record these assets e.g. University isbequeathed large collection or new property or it purchases a collection for its museum. Frequent approach is to write the cost off directly to Income and expenditure

• FRS 15 rules require such assets to be recognised at cost or fair value on balance sheet

• Some exemptions:

– Assets acquired prior to introduction of FRS 15 (pre 31 July 2000)

– Assets where the costs of obtaining a valuation (if a reliable valuation is available) outweigh benefits, but must be disclosed


Heritage assets – discussion paper

• ASB has issued discussion paper – responses were needed by end of last month

• Wants to avoid the inconsistency in accounting for pre and post FRS 15 acquired heritage assets

• Wants to put a current value on all heritage assets• Exemptions where it is not practical to obtain valuations at a

‘reasonable cost’ of the majority by value of assets• Where non capitalisation is followed, related transactions and sales to

be accounted for through ‘Statement of change’ in recognised netassets

• Historic assets used by the HEI and ‘corporate art’ are not heritage assets

• Detailed disclosures including 5 year history of heritage asset transactions


Consolidation – to consolidate or not?

• Many Universities have relationships with Trusts, companies and charities whose principle objectives are to support the University

• Must follow the FRS 2 and FRS 5 principles

– Does the University control the entity e.g. appointing and removing trustees

– Do the Trusts give rise to benefits to the University that are in substance as though from a subsidiary?


Private Finance Initiatives

• Have been around for a while now but still seem to cause problems on the accounting

• The more difficult types:

– Property held by a charity with service level agreement with University to provide accommodation. Borrowings of charity secured on property with no recourse to University. Charity contracts with Housing Association to develop and manage the property – who really controls the charity??

– Property is ‘sold’ at a premium to Housing association but reverts back to University at end of 30 years – how is premium accounted for? Does the transaction transfer substantially the risks and rewards of holding the asset?


Intellectual property deals

– Broker provides up front payment in return for 50% of all share capital on new spin offs for the next 15 years – how do you treat it?

– Broker agrees to fund new building in return for 50% of all share capital and licence income over next 15 years – funding to be paid at various milestones during development of building – is the accounting treatment any different?


‘Mergers’

– Acquisition or merger accounting?

– Fair value considerations

– Loans– Pension schemes– Properties– Treatment of goodwill / negative goodwill


Accounting for patent costs / investments in spin out companies

– Patent costs - capitalise or expense?

– Revaluation of spin out investments?

– Treatment of additional investment in spin out companies?


Deloitte e-room


Deloitte e-room

– Passwords have been sent round

– Access to Deloitte publications such as tax bulletins

– Sheet to hand out


–Questions?

University of Leeds€¦ · • Final standards – Segment reporting (4th quarter) – Share based...

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