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©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)1
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.
An overview of key trends3 ©2006 Deloitte Touche Tohmatsu
Your speaker today
• Tony Firth
Director in Leeds Audit Practice, specialising in HE and Financial Services.
An overview of key trends4 ©2006 Deloitte Touche Tohmatsu
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
©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)5
Accounting – the big picture
An overview of key trends6 ©2006 Deloitte Touche Tohmatsu
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!
An overview of key trends7 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends8 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends9 ©2006 Deloitte Touche Tohmatsu
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
©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)10
Some implementation issues- share based payments- debt/equity classification- pensions
An overview of key trends11 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends12 ©2006 Deloitte Touche Tohmatsu
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
All companies: mandatory for
2005
An overview of key trends13 ©2006 Deloitte Touche Tohmatsu
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
All companies: mandatory for
2005
An overview of key trends14 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends15 ©2006 Deloitte Touche Tohmatsu
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%
An overview of key trends16 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends17 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
An overview of key trends18 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
Opening balance +1,000 -1,500
Net deficit 500
An overview of key trends19 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
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
An overview of key trends20 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
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
Q1 The pensions regulator asks for a special contribution of 200to be paid in the next period. Should we provide for it?
An overview of key trends21 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
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
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
An overview of key trends22 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
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
Q2 The scheme is closed with no further service accrual. The actuarycalculates the liability at 1,200. What entry is required?
An overview of key trends23 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
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
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
An overview of key trends24 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
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
Q3 Pension levy is 15 pa. How is this accounted for?
An overview of key trends25 ©2006 Deloitte Touche Tohmatsu
Pension accounting
Pension Pension P&L STRGL/assets liability a/c SORIE
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
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)
An overview of key trends26 ©2006 Deloitte Touche Tohmatsu
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.
©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)27
Narrative Reporting Update
An overview of key trends28 ©2006 Deloitte Touche Tohmatsu
What we’re covering….
• Operating and Financial Review (OFR)
• Enhanced Business Review (EBR) in directors’ report
• Statement of info given to auditors
• Liability provisions
An overview of key trends29 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends30 ©2006 Deloitte Touche Tohmatsu
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?
An overview of key trends31 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends32 ©2006 Deloitte Touche Tohmatsu
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
©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)33
Enhanced Business Review (EBR)
An overview of key trends34 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends35 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends36 ©2006 Deloitte Touche Tohmatsu
March 2006 Update
• Full explanation of current situation
• Frequently asked questions
• Illustrative EBR for wholly owned subsidiary
• Illustrative OFR
• Checklists for EBR and OFR
©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)37
Statement of info given to auditors
An overview of key trends38 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends39 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends40 ©2006 Deloitte Touche Tohmatsu
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.”
©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)41
Sector Specific issues
An overview of key trends42 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends43 ©2006 Deloitte Touche Tohmatsu
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
©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)44
Difficult areas for the sector under discussion
An overview of key trends45 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends46 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends47 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends48 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends49 ©2006 Deloitte Touche Tohmatsu
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
An overview of key trends50 ©2006 Deloitte Touche Tohmatsu
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?
An overview of key trends51 ©2006 Deloitte Touche Tohmatsu
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?
An overview of key trends52 ©2006 Deloitte Touche Tohmatsu
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?
An overview of key trends53 ©2006 Deloitte Touche Tohmatsu
‘Mergers’
– Acquisition or merger accounting?
– Fair value considerations
– Loans– Pension schemes– Properties– Treatment of goodwill / negative goodwill
An overview of key trends54 ©2006 Deloitte Touche Tohmatsu
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?
©2003 Firm Name/Legal EntityPresentation Name (View / Header and Footer)55
Deloitte e-room
An overview of key trends56 ©2006 Deloitte Touche Tohmatsu
Deloitte e-room
– Passwords have been sent round
– Access to Deloitte publications such as tax bulletins
– Sheet to hand out
An overview of key trends57 ©2006 Deloitte Touche Tohmatsu
–Questions?
An overview of key trends58 ©2006 Deloitte Touche TohmatsuDeloitte & Touche LLP is authorised and regulated by the Financial Services Authority.A member firm ofDeloitte Touche Tohmatsu