Statement of principal accounting policies
STATEMENT OF PRINCIPAL ACCOUNTING POLICIES
The following accounting policies have been applied consistently in dealing with items which are considered material聽in relation to the financial statements.
(A) Basis of preparation (including going concern assessment
The financial statements have been prepared in accordance with the Statement of Recommended Practice:聽Accounting for Further and Higher Education 2019 (鈥淪ORP 2019鈥) and in accordance with Financial Reporting聽Standard (FRS) 102 and with the Accounts Direction issued by the Scottish Funding Council.
The University is a public benefit entity and therefore has applied the relevant public benefit requirement of聽FRS 102. The financial statements have been prepared under the historical cost convention, as modified by聽the revaluation of land and buildings.
The functional currency of the University is pounds sterling, and the financial statements have been prepared聽to round 拢000s.
The financial statements have been prepared on a going concern basis. The University and Group鈥檚 activities,聽financial performance and financial position, together with factors likely to affect its future 性用社ment and聽performance, are described in the Strategic Report. Emerging and principal risks and uncertainties facing the聽University are described on page 5. At 31 July 2020, the University held gross cash of 拢8.8 million (2019 gross聽cash of 拢8.1 million), while net current assets were 拢4.0 million. At 31 January 2021 the University held 拢13.5聽million of gross cash.
The only external borrowings of the University at 31 July 2020 were debt with a balance of 拢29.1 million, comprising covenanted debt with Barclays Bank plc. Between 1 August and 31 January 2021, 拢0.7 million had聽been repaid in accordance with loan agreements. A further 拢1.5 million of borrowings will be repayable during聽the going concern period, which runs for a 12-month period from the date of approval of these financial聽statements to February 2022.
In light of the unprecedented nature of the COVID-19 pandemic and its potential impacts on funding and key聽income streams, there has been significantly increased focus on the area of going concern. The going concern聽assessment included consideration of:
- the current and 性用社ing environment in which the University and Group operates;
- the University鈥檚 liquidity through the assessment period 鈥 demonstrated through a detailed monthly cash flow forecast throughout the assessment period;
- key assumptions made by management around the future financial performance of the University, in particular:
- assumptions around future student intake, in particular EU students, for both 2021/22 and the following academic year;
- assumptions around other income streams for both 2020/21 and the following academic year,
concerning English Language Teaching income and reduced income from accommodation; and
- assumptions around other key cashflows over the review period.
- evidence of compliance with loan covenants at 31 July 2020 and forecast compliance with loan covenants through the going concern period, specifically at 31 July 2021, and subsequent mitigations should there be a breach.
Management has modelled a severe but plausible downside scenario based on extended periods of disruption聽resulting from COVID-19 and the related impacts on tuition fees, other income, increases in COVID-19 related聽expenditure and bad debt, and before any mitigating actions are taken by management. In this scenario, the聽University and Group is still forecasting material liquidity throughout the going concern assessment period to聽February 2022, with minimum liquidity headroom throughout the period of 拢5.1 million at February 2022.
The scenario outlined above would result in the University and group running down its liquidity to a level below聽拢5 million, the minimum level of cash required to ensure compliance with bank covenants, in March 2022, one聽month after the going concern period. Should the University鈥檚 financial position through the going concern period deteriorate in line with the downside scenario outlined or worse, management will make use of the聽following mitigations to address this in advance of it running out of cash
1. Further reducing maintenance costs to the value of 拢0.5 million.
2. A reduction in staff costs through a recruitment freeze to the value of 拢0.1 million.
3. A reduction in cleaning, maintenance and utilities costs for the accommodation block to the value of 拢0.2聽million (to reflect reduced occupancy of the student accommodation during semester and during the summer聽period).
4. Removing temporary accommodation staff costs to the value of 拢0.1 million (to reflect the loss of income聽from summer accommodation letting business).
The University borrowings listed above are subject to covenant terms. The University was fully compliant with聽those covenant terms during the year to 31 July 2020. In response to the significant uncertainties arising as a聽result of the COVID-19 pandemic, the University entered discussions with its lender regarding amendment of聽covenant terms, and reached agreement on revised covenants on 27 January 2021 for the covenants being聽measured at 31 July 2021, the only measurement point in the going concern assessment period. The聽Operational Leverage Covenant has been revised, which is the ratio of borrowing at the end of each relevant聽period to adjusted operating surplus or deficit. Based on the plausible worst case scenario outlined above, the聽University forecasts headroom against the most stringent covenant of 拢0.5 million at 31 July 2021. It also聽forecasts compliance with the remaining covenants at 31 July 2021.
Future viability
The University is continuing to monitor its forecast compliance with covenants including at the next key聽measurement date after the going concern period at 31 July 2022, including under the plausible worst case聽scenario. Should this scenario be realised, in particular in respect of significantly reduced student recruitment聽and residences occupancy in the 2021/22 academic year, management is confident that there are sufficient聽mitigating actions within the University鈥檚 control that would offset this reduced income to ensure compliance聽with future loan covenants, before the requirement for further renegotiation of covenants with its lender.
Based on the assessment outlined above, the University has concluded that it has adequate resources to聽continue in operation for at least 12 months from the approval of these financial statements and for this reason聽the going concern basis continues to be adopted when preparing the financial statements.
(B) Basis of consolidation
The consolidated financial statements include the University and its subsidiary undertaking for the financial聽year ended 31 July 2020. Details of 性用社 Enterprises are given in note 13. Intra-group transactions are聽eliminated on consolidation. Amounts in relation to debts and claims between undertakings included in the聽consolidation are also eliminated.
The consolidated financial statements do not include the results of the 性用社 University Students鈥櫬燯nion on the grounds that it is a separate legal entity in which the University has no financial interest and聽exerts no control or significant influence over policy decisions.
(C) Recognition of income
Tuition fee income is stated gross of any expenditure, which is not a discount and is credited to the聽Consolidated Statement of Comprehensive Income & Expenditure over the period during which students are聽studying. Where the amount of the tuition fee is reduced by a discount for prompt payment, income receivable聽is shown net of the discount. Bursaries and scholarships are accounted for gross as expenditure and are not聽deducted from income.
Income from the sale of goods and services is credited to income in the year in which the goods or services聽are supplied to the customer or the terms of the contract have been satisfied.
Investment income is credited to income on a receivable basis.聽
Funds which the University receives and disburses as paying agent on behalf of a funding body or other body,聽where the institution is exposed to minimal risk or enjoys minimal economic benefit related to the receipt and聽subsequent disbursement of funds, are excluded from the income and expenditure of the University.
Grant funding
Recurrent grants from the Scottish Funding Council are credited to income in the period in which they are聽receivable. Non-recurrent grants and donations are recognised when they are receivable and when聽performance conditions have been met. Income received in advance of performance conditions being met is聽included in creditors as deferred income. Where there are no performance conditions, income is recognised聽when it is receivable.
Donations and endowments
Donations and endowments with donor-imposed restrictions are recognised as income when the University is聽entitled to the funds. Income is retained within the restricted reserve until such time as it is utilised in line with聽such restrictions, at which point the income is released to the general reserve through a reserve transfer.聽Donations with no restrictions are recognised as income when the University is entitled to the funds.
Capital grants
Government capital grants are recognised as income over the expected useful life of the asset. Other capital聽grants are recognised as income when the University is entitled to the funds subject to any performance related聽conditions being met.
(D) Accounting for retirement benefits
Retirement benefits for employees of the University are provided by the Local Government Pension Scheme聽(LGPS) through the Lothian Pension Fund, the Scottish Teachers鈥 Pension Scheme (STPS) and the聽Universities Superannuation Scheme (USS). All three are defined benefit schemes.
Local Government Pension Fund
The Lothian Pension Fund is a funded multi-employer defined benefit scheme, with the assets held in a聽separate trustee-administered fund to meet long-term pension liabilities to past and present employees. The聽University recognises a liability for its share of obligations under the scheme net of its share of plan assets.聽This net defined benefit liability is measured as the estimated amount of benefit that employees have earned聽in return for their service in current and prior periods, discounted to determine its present value, less the fair聽value (at bid price) of plan assets. The fund is valued every three years by professionally qualified independent聽actuaries using the projected unit credit method. Where the calculation results in a net asset, recognition of聽the asset is limited to the extent to which the University is able to recover its share of the surplus, either through聽reduced contributions in the future or through refunds from the plan. In calculating the amount of the provision聽at 31 July 2020, the assumptions used in calculating the McCloud element of the liability have been refined聽based on the most recent data available. This has led to an increase in the liability and the expense of聽拢275,000.
Scottish Teachers鈥 Pension Scheme
The STPS is an unfunded multi-employer defined benefit scheme. Contributions are credited to the Exchequer,聽and the Exchequer effectively meets the costs of all benefits. The scheme is financed by payments from聽employers and from those current employees who are members of the scheme and who pay contributions at聽progressively higher marginal rates based on pensionable pay, as specified in the regulations. The rate of聽employer contributions is set with reference to a funding valuation undertaken by the scheme actuary. The聽University is unable to identify its share of the underlying assets and liabilities of the scheme. Accordingly, the聽University has accounted for its contributions as if it were a defined contribution scheme. The University has聽no obligation for other employers鈥 obligations to the multi-employer scheme.
Universities Superannuation Scheme
The Universities Superannuation Scheme is a hybrid pension scheme, providing defined benefits (for all聽members), as well as defined contribution benefits. The assets of the scheme are held in a separate trustee administered聽fund. Because of the mutual nature of the scheme, the assets are not attributed to individual聽institutions and a scheme-wide contribution rate is set. The University is therefore exposed to actuarial risks聽associated with other institutions鈥 employees and is unable to identify its share of the underlying assets and聽liabilities of the scheme on a consistent and reasonable basis. As required by Section 28 of FRS 102聽(Employee Benefits), the University therefore accounts for the scheme as if it were a wholly defined聽contribution scheme. As a result, the amount charged to the income and expenditure account represents the聽contributions payable to the scheme in respect of the accounting period. Since the University has entered into聽an agreement (the Recovery Plan) that determines how each employer within the scheme will fund the overall聽deficit, the University recognises a liability for the contributions payable that arise from the agreement (to the聽extent that they relate to the deficit) and therefore an expense is recognised in the income and expenditure聽account.
Enhanced pension benefits
In a number of instances, the University has agreed to provide enhanced pension benefits in respect of聽members of staff taking early retirement. These additional benefits are unfunded and are charged, as and聽when they arise, against a provision established when members retire to meet this liability. This provision聽relates to former members of staff who are members of the STSS and a small number of staff in receipt of exgratia聽pension payments from the University.
(E) Employment benefits
Short-term employment benefits such as salaries and compensated absences are recognised as an expense聽in the year in which the employee renders service to the University. Any unused benefits are accrued and聽measured as the additional amount that the University expects to pay as a result of the unused entitlement.
(F) Leases and hire purchase contracts
Leasing agreements which transfer to the University substantially all the benefits and risks of ownership of an聽asset are treated as if the asset had been purchased outright. The assets are included in fixed assets and the聽capital elements of the leasing commitments are shown as obligations under finance leases. The lease rentals聽are treated as consisting of capital and interest elements. The capital element is applied in order to reduce聽outstanding obligations and the interest element is charged to the income and expenditure account in聽proportion to the reducing capital element outstanding. Assets held under finance leases are depreciated over聽the shorter of the lease term or the useful economic lives of equivalent owned assets.
(G) Foreign currency translations
Assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the聽end of the financial year, with all resulting exchange differences being taken to the income and expenditure聽account in the year in which they arise.
(H) Fixed assets
Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Certain聽items of fixed assets which had been revalued to fair value on or prior to the date of transition to SORP 2015聽are held on a basis of fair value cost, being the revalued amount at the date of that valuation. Where parts of聽a fixed asset have different useful lives, they are accounted for as separate items of fixed assets.聽
Land and Buildings are stated at cost or valuation. Land and Buildings are externally valued every five years.聽The basis of valuation is depreciated replacement cost. In the period between external valuations the聽University Court reviews the value of the assets. Where the value of the Land and Buildings is considered to聽be below cost, either by external valuation or as a result of the Court鈥檚 review, and this is considered to be a聽permanent diminution in value, the difference is charged to the income & expenditure account as an聽impairment charge. The part of the University campus comprising the academic buildings was revalued at 31聽July 2020 by Gerald Eve, Chartered Surveyors. The basis of the valuation, which was carried out in accordance聽with guidelines issued by the Royal Institution of Chartered Surveyors, is depreciated replacement cost.
The heritable properties comprising the 性用社 University Student Village were valued as at 31 July聽2020 by, Gerald Eve LLP, a regulated firm of Chartered Surveyors. The valuation was prepared in accordance聽with the requirements of the RICS Valuation - Global Standards (July 2017 edition) and Financial Reporting聽Standard 102 and the 2019 Statement of Recommended Practice 'Accounting for Further and Higher聽Education'. The valuation was undertaken on a Fair Value basis, equated to Market Value on the assumption聽of a continuation of the existing use.
Costs incurred in relation to a tangible fixed asset after its initial purchase or production are capitalised to the聽extent that they increase the expected future benefits to the University from the existing tangible fixed asset聽beyond its previously assessed standard of performance. The cost of routine maintenance is not capitalised,聽but is charged to the income and expenditure account in the year in which it is incurred.
Heritable land is not depreciated. Heritable buildings are depreciated on a straight line basis over their聽expected useful lives of between 10 and 50 years. No depreciation is charged on assets in the course of聽construction.
Equipment, including computer equipment and software, costing less than 拢10,000 per individual item or group聽of related items is written off in the year of acquisition. All other equipment is capitalised and depreciated on a聽straight line basis over periods ranging from three to five years, being its expected useful life. A full year鈥檚聽depreciation charge is made in the year of acquisition of the item of equipment.
(I) Investments
Investments in subsidiaries are shown at cost. Current asset investments are held at fair value with any聽movements recognised in the surplus or deficit.
(J) Cash and cash equivalents
Cash includes cash in hand, deposits repayable on demand and overdrafts. Deposits are repayable on聽demand if they are in practice available within 24 hours without penalty. No investments, however liquid, are聽included as cash. Liquid resources comprise assets held as a readily disposable store of value. They include聽term deposits, government securities and loan stock held as part of the University鈥檚 treasury management聽activities.
(K) Provisions, contingent liabilities and contingent assets
Provisions are recognised when the University has a present legal or constructive obligation as a result of a聽past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a聽reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is聽discounted to present value where the time value of money is material. The discount rate used reflects current聽market assessments of the time value of money and reflects any risks specific to the liability.
A contingent liability arises from a past event that imposes upon the University a possible obligation, the聽existence of which will only be confirmed by the occurrence or otherwise of uncertain future events not wholly聽within the control of the University. A contingent liability may also arise in circumstances where a provision聽would otherwise be made but either it is not probable that an outflow of resources will be required or where聽the amount of the obligation cannot be measured reliably.
A contingent asset arises where an event has taken place which entitles the University to a possible asset, the聽existence of which will only be confirmed by the occurrence or otherwise of uncertain future events not wholly聽within the control of the University. Contingent assets and liabilities are not recognised in the Balance Sheet聽but are disclosed by way of a note.
(L) Taxation
The University is an exempt Charity within the meaning of the Trustee Investment and Charities (Scotland) Act聽2005, and as such is a charity within the meaning of section 506(1) of the Income and Corporation Taxes Act聽1988. The University is recognised as a charity by HM Revenue & Customs and is recorded on the index of聽charities maintained by the Office of the Scottish Charity Regulator. It is therefore a charity within the meaning of Para 1 of schedule 6 to the Finance Act 2010 and accordingly, the University is potentially exempt from聽taxation in respect of income and capital gains received within categories covered by sections 478 to 488 of聽the Corporation Tax Act 2010 or section 256 of the Taxation of Chargeable Gains Act 1992, to the extent that聽such income or gains are applied exclusively for charitable purposes.
The University receives no similar exemption in respect of Value Added Tax (VAT). Irrecoverable VAT arising聽from expenditure on non-trading activities is charged to the income and expenditure account. Any irrecoverable聽VAT allocated to fixed assets is included in their cost.
(M) Reserves
Reserves are classified as either restricted or unrestricted. Restricted endowment reserves include balances聽which, through endowment to the University, are held as a permanently restricted fund which the University聽must hold in perpetuity. Other restricted reserves include balances where the donor has designated a specific聽purpose and therefore the University is restricted in the purposes for which it may use these funds.聽The policy is to revalue the estate every 5 years, and any surplus arising is added to the revaluation reserve.
(N) Judgements and key sources of estimation uncertainty
The preparation of the financial statements requires management to make judgements, estimates and聽assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the聽amounts reported for revenues and expenses during the year. It is the view of the directors that there are no聽significant or material accounting judgements. The following are the key sources of estimation uncertainty:
Pension and other post-employment benefits
The cost of defined benefit pension plans and other post-employment benefits are determined using actuarial聽valuations. The actuarial valuation involves making assumptions about discount rates, future salary increases,聽mortality rates and future pension increases. Due to the complexity of the valuation, the underlying聽assumptions and the long term nature of these plans, such estimates are subject to significant uncertainty. In聽determining the appropriate discount rate, management considers the interest rates of corporate bonds in the聽respective currency with at least AA rating, with extrapolated maturities corresponding to the expected duration聽of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having聽excessive credit spreads are removed from the population bonds on which the discount rate is based, on the聽basis that they do not represent high quality bonds. The mortality rate is based on publicly available mortality聽tables for the specific country. Future salary increases and pension increases are based on expected future聽inflation rates for the respective country. Further details are given in note 21 to the financial statements.
Valuation of land and buildings
The part of the University campus comprising the student accommodation was revalued at 31 July 2020 by聽Gerald Eve, Chartered Surveyors. The valuation was prepared in accordance with the requirements of the聽RICS Valuation - Global Standards (July 2017 edition) and Financial Reporting Standard 102 and the 2019聽Statement of Recommended Practice 'Accounting for Further and Higher Education'. The valuation was聽undertaken on a Fair Value basis, equated to Market Value on the assumption of a continuation of the existing聽use. This exercise resulted in a revaluation loss of 拢4.314 million, which has been reflected in the financial聽statements. The valuation took into account the impact of the COVID-19 pandemic on the short-term reduction聽in the ability to generate income from summer letting activities.
The part of the University campus comprising the academic buildings was revalued at 31 July 2020 by Gerald聽Eve, Chartered Surveyors. The basis of the valuation, which was carried out in accordance with guidelines聽issued by the Royal Institution of Chartered Surveyors, is depreciated replacement cost. This exercise resulted聽in a revaluation gain of 拢9.486 million, which has been reflected in the financial statements.
Management has considered the basis used to undertake both valuations and has satisfied itself that the basis,聽and the resulting valuations, are reasonable.
The net revaluation gain arising out of the two valuations was 拢5.172 million.
Consideration has been given to the effects of the COVID-19 pandemic on the University鈥檚 property assets聽and their associated values. The COVID-19 outbreak is a global pandemic that has affected all parts of the聽global community. It is a fast-changing, fluid situation, with government recommendations and requirements聽being reviewed and updated on an ongoing basis. Many business sectors have been forced to close as part聽of government restrictions to reduce the spread of the virus, and the full effects of the virus on property markets聽and the wider economy are yet to be fully understood, assessed or quantified. Currently, there is insufficient聽empirical data available to make an informed and evidence-based decision on whether or not there has been聽a significant impact on asset valuations. Occupancy levels, rental figures, land values and BCIS costs and聽indices will all require to be monitored and reviewed going forward to assess the full impact of the COVID-19聽outbreak on asset valuations. In light of the foregoing, it is considered appropriate to include the following聽RCIS-approved 鈥淢aterial Valuation Uncertainty鈥 statement.
Material Valuation Uncertainty Statement
The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a 鈥淕lobal聽Pandemic鈥 on the 11th March 2020, has impacted global financial markets. Travel restrictions have been聽implemented by many countries. Market activity is being impacted in many sectors. As at the valuation date,聽in terms of the non-residential accommodation, we consider that we can attach less weight to previous market聽evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19聽means that we are faced with an unprecedented set of circumstances on which to base a judgement. Gerald聽Eve have therefore indicated that their valuations, upon which management has relied, are reported as being聽subject to 鈥榤aterial valuation uncertainty鈥 as set out in VPS 3 and VPGA 10 of the RICS Valuation 鈥 Global聽Standards. Consequently, less certainty 鈥 and a higher degree of caution 鈥 should be attached to the聽valuations than would normally be the case. Given the unknown future impact that COVID-19 might have on聽the real estate market, the valuation of these properties will be kept under frequent review.
For the avoidance of doubt, the inclusion of the 鈥榤aterial valuation uncertainty鈥 declaration above does not聽mean that the valuation cannot be relied upon. Rather, the declaration has been included to ensure聽transparency of the fact that 鈥 in the current extraordinary circumstances 鈥 less certainty can be attached to聽the valuation than would otherwise be the case. The material uncertainty clause is to serve as a precaution聽and does not invalidate the valuation.
Effect if actual results differ from assumptions
The value of all of the University鈥檚 land and buildings subject to revaluation was 拢126.4 million prior to the聽2020 revaluation. The impact of a 5% change in valuation would be 拢6.3 million, either resulting in an increase聽or a decrease in the University鈥檚 revaluation reserve or an additional impairment charge.
