Guidance for Governors considering going concern
01/07/2009
Going concern is a fundamental accounting concept for the preparation of financial statements. A college should prepare its financial statements on a going concern basis unless the college is being liquidated or has ceased trading (or there is an intention to be liquidated or cease trading).
Governors are required to satisfy themselves that it is reasonable to prepare the college’s financial statements on a going concern basis. These requirements are not intended to, and do not, guarantee that the college will remain a going concern until the next annual financial statements are issued.
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The position at least 12 months from the date of the approval of the financial statements should be considered.
Colleges are all required to prepare three year financial forecasts so should have the overview position available. However, more detailed monthly cash flow forecasts for the next 12 months and any anticipated crunch periods will be needed.
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Governors’ considerations will generally result in one of the following conclusions.
Conclusion
No material uncertainties leading to significant doubt about going concern have been identified by the governors.
Effect
Going concern is presumed in preparing financial statements. Statement in Statement of Corporate Governance and Internal Control that the college is a going concern. However, disclosure may need to be made about liquidity risk and other matters necessary to give a true and fair view.
Impact on auditor's report
Unmodified report – provided the auditor agrees with the governors’ assessment and supporting disclosures.
Conclusion
Material uncertainties leading to significant doubt about going concern have been identified by the governors but the going concern basis remains appropriate
Effect
Disclosures explaining the specific nature of the material uncertainties that give rise to significant doubt and explaining why going concern basis has still been adopted.
Impact on auditor's report
Modified report including an emphasis of matter paragraph highlighting the existence of material uncertainties – provided the auditor concurs with the governors’ assessment and supporting disclosures.
Conclusion
The going concern basis is not appropriate.
Effect
Disclosures explaining the basis of conclusion and the accounting policies applied in preparing the financial statements on a non-going concern basis.
Impact on auditor's report
Unmodified report – provided that the financial statements contain the necessary disclosures and the auditor considers the basis to be appropriate to the specific facts and circumstances.
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Governors should plan their assessment of going concern well in advance of the date set for approval of the financial statements. Detailed board papers will be needed and, potentially, discussion with bankers, funders, regulators and auditors. The governors’ conclusions and their basis should be formally minuted.
In the sections below we set out some areas for you to consider.
Forecasts and budget
- does the college have monthly cash flow forecasts and monthly budgets covering at least 12 months from the expected date of approval of the financial statements?
- are the underlying assumptions reasonable?
- in line with LSC Financial Planning Handbook or other guidance for your areas
- in line with published levels of funding
- achievable, fundable growth, considering activities of other providers and government priorities
- fee income assumptions; is the expected employer/learner contribution achievable?
- inflation levels
- salary increases
- pension costs
- overhead levels
- working capital requirements
- potential bad debts; cash collection periods
- How accurate have past forecasts been?
- Have sensitivity analyses been carried out and 'what if' scenarios tested?
Capital project
For many colleges the funding for capital projects in development (ie not yet with approval in detail) is uncertain. Colleges are unlikely to gain funding for major projects and may not be granted support for costs already incurred. If funding is given it may be over an extended period, leading to increased interest costs.
Governors should request worst case scenario modelling from management.
Pensions
Salary and related costs (particularly pensions) account for over 70% of expenditure for most colleges. It is anticipated that pension costs - contribution and scheme deficits will increase.
Demand led funding
With the introduction of demand led funding future levels of funding are now uncertain.
It is vital that governors receive prompt and accurate data about the current level of provision in order that they can prioritise medium and long term strategies and plan for any recovery of funds.
Robust controls over the recording of data are essential in ensuring that college management, and the governing body, are being provided with the most up to date and relevant information regarding the college’s provision.
The Audit Committee should be paying particular attention to the findings of internal and external audits and ensuring that the college management is following up recommendations quickly and effectively.
Borrowing requirements
- are the covenants on current borrowings met as at the balance sheet date? (if not; borrowings will need to be reclassified as current liabilities)
- are there any arrears of interest as at the balance sheet date?
- are there any projected short falls in borrowings available compared to borrowings needed?
- have forecasts been tested against covenants for any anticipated breaches?
- have any necessary negotiations with the bank been held?
Governors should be wary of banks seeking higher margins where there are actual or potential covenant breaches.
Contingent liabilities
Have contingent liabilities been considered? for example:
- legal proceedings
- grants received that are subject to conditions
- claw-back of demand led funding
- penalties in not going ahead with building contracts
- anticipated disposal proceeds not being achieved
Political environment
The changes in machinery of government have significant implication for colleges. Is the college doing all it can to mitigate any negative impact?
It is proposed that responsibility for commissioning education and training for 16-18 year olds transfers to local authorities. Have you got a good working relationship with your local authority?
Responsibility for post 19 provision will rest with the Skills Funding Agency. An added complication is the merger of the Department for Innovation Universities and Skills with Business Enterprise and Regulatory Reform to form the Department for Business, Innovation and Skills. At least initially, this is likely to bring more uncertainty to the post 19 market.
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In their Statement of Corporate Governance and Internal Control the governors need to conclude on the appropriateness of the going concern presumption.
Principal risks and uncertainties should be explained in the Operating and Financial Review.