Introduction
The Academy Accounts Direction 2020-2021 (‘AAD’) which applies to financial statements for accounting periods ending 31 August 2021 was published in March 2021. A key impact is to require enhanced wording in the trustees’ report and governance statement. Also, a more detailed disclosure of DfE / ESFA income is required.
ESFA is again intending to issue a supplementary bulletin to the AAD which covers reporting of Covid-19 impacts and we will provide an update on it in due course.
Structure of documents
Over the years, the AAD has become a lengthy, complex document and so ESFA has split it into three separate documents for 2021:
- Annual Accounts Direction – the accounting and regulatory guidance for trusts
- Academies model accounts (‘Coketown accounts’)
- Framework and guide for external auditors and reporting accountants of academy trusts – not a snappy title but it does what it says on the tin!
In our view, it is a useful development to split the document in this way.
Trustee’s Report and Governance Statement
Financial Review – tell the story
ESFA is looking for improved wording in the financial review so that it ‘sheds light on the numbers shown in the financial statements, including why and how they have arisen, in terms that a non-accountant would understand’. It also lists nine points to be covered in the financial review – some are ‘musts’ and some are ‘shoulds’ – see AAD 2021 Section 2.14.
The financial review must:
- explain the financial effect of significant events on the financial performance and financial position of the trust
- explain the academy trust’s principal risks and uncertainties and its plan for managing those risks
- describe any key factors that are likely to affect the trust’s financial performance or position going forward
- explain the overall financial position of the academy trust at the reporting date (likely to be based primarily on the balance sheet). This narrative will provide context to, and insight on, the numbers in the financial statements, focussing on material or significant balances
- identify any fund or subsidiary undertaking that is materially in deficit, explaining the circumstances giving rise to the deficit and the steps being taken to eliminate the deficit.
The financial review should:
- explain the financial performance of the academy trust in the year (likely to be based primarily on the SOFA). It is likely to include, but not be limited to, an explanation of the causes of the trust’s net income/(expenditure) balance this year
- describe the principal funding sources of the trust and explain how resources support the key objectives of the trust
- explain the academy trust’s investment policy and where the trust hold material investments, the extent (if any) to which it takes social, environmental, or ethical considerations into account in its investment policy
- describe the academy trust’s fundraising practices.
Trusts which have unfortunately been issued with a financial notice to improve during the year, need to provide details in their Financial Review (AAD 2021 Section 2.7).
Feedback from ESFA – ‘boiler plate’ wording to be avoided
A new section of the AAD provides feedback from ESFA to the sector and a key aspect is a guidance on how to use the wording in Coketown.
Some wording is illustrative
The section notes that some of the wording in the Coketown accounts is illustrative and should be tailored to apply to the specific trust. In particular, it highlights the Governance Statement as an area for improvement, with the specific text in Coketown only being used to reflect the Trust’s circumstances.
ESFA notes that it often comes across cases where significant governance, control or financial management issues are highlighted in the external audit report, for example, yet the relevant sections of the annual report paint a conflicting picture because the text provided in Coketown has been copied across without amendment.
Some is required disclosure
Coketown also includes some areas of required disclosure and examples of this which are frequently omitted are as follows:
- Key changes in the composition of the board of trustees
- Coverage of the board’s work
- Actions to review board effectiveness
- Where the board has met less than six times in the year, details of how effective oversight has been maintained
- Details of how internal scrutiny function has been delivered
- Details of remedial action taken or proposed in relation to any key control issues identified
Accounts Disclosure
Staff costs
Under the Academies Financial Handbook 2020, trusts must obtain ESFA approval where the CEO (Accounting Officer) or the CFO are not employees of the trust.
If such individuals are not employees, there will instead be an ‘off-payroll’ arrangement, either with them or another entity, for their services to the trust.
AAD 2021 requires the amount paid by the trust for that person’s work to be included in the staff costs disclosure note in the accounts (table of employees earning over £60k in £10k bands), and in the figure for key management personnel remuneration. This requirement applies to all ‘off-payroll’ arrangements, not just the CEO and CFO. The prior-year figures should also be reported and this may necessitate restatement of prior year figures in the 2021 accounts.
Analysis of funding from DfE and ESFA
The AAD now requires each material grant from the DfE or ESFA to be disclosed separately in the accounts note rather than under the blanket heading of ‘other DfE/ESFA grants’. GAG must be disclosed separately and Coketown also highlights Pupil Premium, Universal Infant Free School Meals, Pupil Number Adjustment and Teachers Pay Grant as examples of other such grants which may be material.
Any remaining grants from DfE/ESFA should be grouped under the heading of ‘Other’.
Grants from other bodies within the ESFA group should also be disclosed in a separate category and examples given are the Student Loan Company and the Standards and Testing Agency.
When the 2021 analysis has been settled, consideration should be given to restating the 2020 note in the same way and Coketown (page 42) provides illustrative wording to explain this restatement which should be included where applicable.
This disclosure ties in with the Annual Accounts Return and will push trusts to consider adopting the ESFA’s Chart of Account model which shows separate nominal ledger codes for each such category of income.
If you would like to discuss any of these points, please contact your usual academy contacts at BHP.
