1 Basis of preparation
The financial statements have been prepared in accordance with both the FE/HE Statement of Recommended Practice (SORP) and with Financial Reporting Standard (FRS) 102. We are a public benefit entity and therefore have applied the relevant public benefit requirements of FRS102.
The financial statements are prepared under the historical cost convention (modified by the revaluation of fixed assets, non-current and current asset investments and derivative financial instruments).
As the Group has substantial reserves and is forecasting continuing surpluses, the financial statements have been prepared on a going concern basis.
In recent years we have had a financial strategy that includes budgeting to achieve an operating surplus of 3% of income and maintaining a high level of liquidity. This has left us well placed to withstand the impact of COVID19. The impact of COVID19 will be more profound in 2020/21 and Council have approved a budget for 2020/21 which does not meet the 3% target for Historic Cost Operating Surplus (HCOS). The five-year plan includes a recovery to the 3% target. Future forecasts have been tested against a number of financial scenarios and these indicate sufficient headroom exists that loan covenants will not be breached.
2 Basis of consolidation
These financial statements consolidate the results of our and our subsidiary undertaking for the financial year to 31 July 2020.
The consolidated financial statements do not include those of our Students’ Union as it is a separate organisation over which we do not exert control, nor exercise dominant influence, over their policy decisions.
3 Recognition of income
Income from the sale of goods or services is credited to the Statement of Consolidated Income (SOCI) when the goods or services are supplied to the external customer or the terms of the contract have been satisfied.
Fee income is stated gross of any expenditure which is not a discount and credited to the SOCI over the period in which the students are studying. Bursaries and scholarships are accounted for gross as expenditure and not deducted from income.
All income from short-term investments and deposits (including those held as endowments) is credited to the SOCI on a receivable basis.
Grant funding, including Funding Council grant; research grants from government sources; and grants (including research grants) from non-government sources are recognised as income when we are entitled to the income and performance related conditions have been met. Income received in advance of the performance related condition being met is recognised as deferred income within creditors on the balance sheet and released to income as the conditions are met.
Donations and endowments
Non exchange transactions without performance related conditions include donations and endowments. Those with donor imposed restrictions are recognised in income when we are entitled to the funds. Income is retained within the restricted reserve until such time that it is utilised in line with such restrictions, at which point the income is released to the general reserve through a reserve transfer. Donations freely given, with no donor imposed restriction, are recognised in income when we are entitled to the funds.
There are four main types of donations and endowments identified within reserves:
- restricted donations – the donor has specified that the donation must be used for a particular objective.
- unrestricted permanent endowments – the donor has specified that the fund is to be permanently invested to generate an income stream for our general benefit
- restricted expendable endowments - the donor has specified a particular objective other than the purchase or construction of tangible fixed assets, and we have the power to use this capital
- restricted permanent endowments – the donor has specified that the fund is to be permanently invested to generate an income stream to be applied to a particular objective
Capital grants are recognised as income when we are entitled to the income and performance related conditions have been met.
4 Accounting for retirement benefits
The two principal pension schemes in which we participate are Universities Superannuation Scheme (USS) and the Avon Pension Fund (APF), part of Local Government Pension Scheme (LGPS). Throughout current and preceding periods, both these schemes are defined benefit only schemes and externally funded. The assets of these schemes are held in separate trustee-administered funds. Each fund is valued every three years by professionally qualified independent actuaries.
Defined benefit scheme
Defined benefit schemes are post-employment benefit schemes other than defined contribution schemes. Our obligation is to provide the agreed benefits to current and former employees, and actuarial risk (that benefits will cost more or less than expected) and investment risk (that returns on assets set aside to fund the benefits will differ from expectations) are borne, in substance, by us. We recognise a liability for our obligations under defined benefit schemes net of scheme assets.
This net defined benefit liability is measured as the estimated amount of benefit that employees have earned in return for their service in the current and prior periods, discounted to determine its present value, less the fair value (at bid price) of scheme assets. The calculation is performed by a qualified actuary using the projected unit credit method. Where the calculation results in a net asset, recognition of the asset is limited to the extent to which we are able to recover the surplus either through reduced contributions in the future or through refunds from the scheme.
Local Government Pension Scheme (LGPS)
The LGPS is a funded scheme. The assets of the LGPS are measured using the closing fair values. LGPS liabilities are measured using the projected unit credit method and discounted at the current rate of return on a high quality corporate bond of the equivalent term to the liabilities. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date. The amounts charged to the operating surplus are the current service costs and the cost of scheme introductions, benefit charges, settlements and curtailments. They are included as part of staff costs as incurred. Net interest on the net defined benefit liability/asset is also recognised in the SOCI and comprises the interest cost on the defined benefit obligation and interest income on the schemes assets, calculated by multiplying the fair value of the schemes assets at the beginning of the period by the rate used to discount the benefit obligations.
Defined contribution scheme
Defined contribution schemes are post-employment benefit schemes under which we pay fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension schemes are recognised as an expense in the SOCI in the periods during which services were rendered by employees.
Universities Superannuation Scheme (USS)
USS is a multi-employer scheme for which it is not possible to identify our share of the underlying assets and liabilities due to the mutual nature of the scheme. Therefore we are required to account for it as if it were a defined contribution scheme. The SOCI represents the contributions payable to the scheme in the accounting period.
A liability is recorded within provisions for the discounted fair value of the contractual contributions under the deficit recovery plan in existence at the balance sheet date.
5 Employee benefits
Short-term employment benefits, such as salaries and compensated absences (paid annual leave) are recognised as an expense in the year in which the employees render service to us. Any unused benefits are accrued and measured as the additional amount that we expect to pay as a result of the unused entitlement.
6 Foreign currency
Transactions denominated in foreign currencies are translated using the rate of exchange ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the end of the financial period, with all resulting exchange differences being recognised in the SOCI. Exchange differences arising on the translation of a financial liability designated as an effective hedge against a foreign denominated investment are recognised in the SOCI as Other Comprehensive Income.
Operating leases are where we do not assume substantially all the risks and rewards of ownership, rental costs under operating leases are charged to the SOCI as the costs are incurred. Any lease premium or incentives are spread over the minimum lease term.
Finance leases are where we assume substantially all the risks and rewards of ownership of the asset. Leased assets acquired by way of a finance lease and the corresponding lease liability are initially recognised at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease. Minimum lease payments are apportioned between the finance charge and the reduction of the outstandingliability. The finance charge is allocated to each period during the lease so as to produce a constant rate of interest on the remaining balance of the liability.
8 Fixed Assets
Land and buildings
Land and buildings are measured using the revaluation model. Under the revaluation model, assets are revalued to their fair value. We have a policy of ensuring all assets are revalued by an external valuer every four years, such that the fair value is not materially different to the current value. The basis of the valuation is a combination of depreciated replacement cost, existing use and open market value depending on the nature of the property.
Freehold and Leasehold land are not depreciated as they are considered to have an indefinite useful life.
Buildings are depreciated over a maximum period of 50 years. The remaining expected life of buildings is reviewed annually by an appropriately qualified member of our Estates department and, where material, the future depreciation is adjusted in accordance with FRS102. Land and building additions since the last valuation and assets in the course of construction are valued at cost. Depreciation commences at the beginning of the year following occupation.
Building refurbishments are depreciated over the remaining expected life of the building in which the refurbishment takes place, up to a maximum of 25 years. At the next revaluation the entire building will be re-lifed as appropriate.
Assets under the course of construction are all valued at cost and include a mixture of new buildings and refurbishments and improvements to existing buildings.
Interest is capitalised where it is incurred in the construction of new buildings which are substantially funded by loans arranged by us. The cost is depreciated in line with the building.
Equipment costing less than £25k per individual item is written off in the year of acquisition unless it forms part of a group of related items or part of a capital project, in which case it is capitalised.
Capitalised equipment is stated at cost or, where donated, at valuation, and depreciated, on a straight line basis, as follows:
- general equipment - 5 years
- furniture - 5 years
- catering equipment - 7 years
- equipment required for specific grants - project life (generally 3 years)
Where equipment is donated, the asset is recorded at valuation. The donation is recorded as income in the SOCI in the year it is received.
9 Maintenance of premises
The cost of routine corrective maintenance and planned maintenance are both charged to the SOCI in the period in which it is incurred. We have a planned maintenance programme, which is reviewed on an annual basis.
Non-current and current asset investments are held at fair value where this can be readily determined and cost where no market exists. Those investments with a maturity of 3 months or less are shown as cash and cash equivalents. The fair value movement in non-current and current asset investments is recognised in the SOCI.
We use derivative financial instruments to reduce exposure to interest rate movements on our loans and foreign exchange movements on our investments. These derivatives are not held for speculation purposes and relate to actual assets or liabilities. Derivatives are held on the Balance Sheet at fair value. We have adopted and complied with the requirements of hedge accounting and as a result movements in fair values are recorded within other comprehensive income where the hedging arrangement is effective and in interest payable where it is deemed to be ineffective.
Stocks are stated at the lower of cost and net realisable value.
13 Cash and cash equivalent
Cash includes cash in hand, deposits repayable on demand and overdrafts. Deposits are repayable on demand if, in practice, they are available within 24 hours without penalty.
Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash with insignificant risk of change in value.
Assets that form Endowment funds are included within Cash at Bank or Investments as appropriate.
14 Provisions, contingent liabilities and contingent assets
Provisions are recognised in the financial statements when:
- a) we have a present (legal or constructive) obligation as a result of a past event; and
- b) it is probable that a transfer of economic benefit will be required to settle the obligation; and
- c) a reliable estimate can be made of the amount of the obligation
The amount recognised as a provision is determined by discounting the expected future cash flow at a pre-tax rate that reflects risks specific to the liability.
Contingent liabilities arise from a past event that gives us a possible obligation whose existence will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within our control. Contingent liabilities also arise in circumstances where a provision would otherwise be made but either it is not probable that an outflow of resource will be required or the amount of the obligation cannot be measured reliably.
A contingent asset arises where an event has taken place that gives us a possible asset whose existence will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within our control.
Contingent assets and liabilities are not recognised in the Balance Sheet but disclosed in the notes when required.
15 Taxation status
We are an exempt charity within the meaning of Schedule 3 of the Charities Act 2011. It is therefore a charity within the meaning of Paragraph 1 Schedule 6 Finance Act 2010 and therefore it meets the definition of a charitable company for UK corporation tax purposes.
Accordingly, we are potentially exempt from taxation in respect of income or capital gains received within categories covered by section 478-488 of the Corporation Tax Act 2010 or section 256 of the Taxation of Chargeable Gains Act 1992, to the extent that such income or gains are applied to exclusively charitable purposes.
We receive no similar exemption in respect of (Value Added Tax) VAT. Irrecoverable VAT on inputs is included in the costs of such inputs. Any irrecoverable VAT allocated to fixed assets is included in their cost. Our subsidiary companies are subject to corporation tax and VAT in the same way as any commercial organisation.
16 Key sources of estimation uncertainty and judgements in applying accounting policies
Key sources of estimation uncertainty:
Land and buildings are held at fair value. A periodic valuation exercise is undertaken by an external qualified chartered surveyor to ensure the carrying value of the assets are not materially different to their fair value. We will apply the methodology adopted by the external surveyor to other buildings by extrapolation to ensure the assets are not materially misstated in the financial statements. Tangible fixed assets, other than investment properties, are depreciated over their remaining useful economic lives taking into account residual value, where appropriate, see note 13 for the carrying amount of the property, plant and equipment. The remaining useful economic life of an asset and any residual value are assessed annually by a qualified member of staff and may vary depending on a number of factors. In reassessing asset lives, factors such as technological innovation and maintenance programmes are taken into account.
Local Government Pension Scheme (LGPS)
The present value of the LGPS defined benefit liability depends on a number of factors that are determined on an actuarial basis using a variety of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these assumptions, which are disclosed in note 26, will impact the carrying amount of the pension liability. Sensitivity analysis is also included in note 26 based on the assumptions used. Furthermore a roll forward approach which projects results from the latest full actuarial valuation performed at 31 March 2019 has been used by the actuary in valuing the pensions liability at 31 July 2020. Any differences between the figures derived from the roll forward approach and a full actuarial valuation would impact on the carrying amount of the pension liability.
Universities Superannuation Scheme (USS)
The present value of the USS provision depends on a number of estimates used by management in respect of discount rate, future salary increases and numbers of staff in the USS. Any changes in these assumptions, which are disclosed in note 21, will impact the carrying amount of the pension liability.
FRS 102 makes the distinction between a group plan and a multi-employer scheme. A group plan consists of a collection of entities under common control typically with a sponsoring employer. A multi-employer scheme is a scheme for entities not under common control and represents (typically) an industry-wide scheme such as USS. The accounting for a multi-employer scheme where the employer has entered into an agreement with the scheme that determines how the employer will fund a deficit results in the recognition of a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deficit) and the resulting expense in profit or loss in accordance with section 28 of FRS 102. The directors are satisfied that USS meets the definition of a multi-employer scheme and has therefore recognised the discounted fair value of the contractual contributions under the recovery plan in existence at the date of approving the financial statements.
Impairment of debtors
We make an estimate for the recoverable value of trade and other debtors. When assessing impairment of trade and other debtors, management considers factors including the current credit rating of the debtor, the ageing profile of debtors and historical experience. See note 15 for the net carrying amount of the debtors.
Classification of financial liabilities
All of our financial liabilities have been classified as basic financial instruments. In respect of the loans made by North Western Mutual Life Insurance Company and Met Life (see note 19), judgement has been applied in determining this classification.
As part of the agreement, the issuers of the debt, who are based in the US, have entered into a cross currency swap to ensure that they are not adversely impacted by foreign exchange rate movements between $ and £, should we repay the debt early. We consider any resultant financial impact for us to represent reasonable compensation for early repayment and as such have classified the debt as basic. As a result, the financial liability is reflected in the financial statements at amortised cost.