The threat posed by accounting reforms

The changes will make sector results look worse than they are, warn Andrew Connolly and Clare Partridge

November 21, 2013

Volatile results and smaller balance sheets will only add fuel to the smouldering unease lit by the coalition’s reforms

Universities hoping to tempt the nascent breed of “student consumers” by building shiny new libraries, students’ union buildings and accommodation blocks could find their efforts to finance such projects hampered by changes to the accounting rules.

The changes, which will apply from the 2015-16 financial year, are the result of the Financial Reporting Council’s desire to bring all UK accounting into line with international standards.

The UK’s Sorp Board – the body responsible for overseeing the Statement of Recommended Practice, which defines accounting methods within further and higher education – has been consulting the sector on what this will mean in practice.

One proposal is that the Universities Superannuation Scheme’s deficit be brought on to universities’ balance sheets. This seems fair enough. In 2012, the pension scheme agreed a 10-year deficit recovery plan with the academy. It is relatively easy to estimate the cost for each institution of meeting its share of this obligation, so why shouldn’t it be recognised as a real liability on university balance sheets?

The challenge will be dealing with the size of the impact. At the USS’ most recent triennial valuation in 2011, the deficit was calculated as £2.9 billion, but the next valuation, in March 2014, is likely to put the figure at nearer £8 billion. That huge increase would reduce the net assets on many university balance sheets.

Other proposed changes include accounting for any unused staff leave or sabbatical entitlement at the end of the financial year. Meanwhile, many privately financed student accommodation deals are likely to come back on to university balance sheets as assets with matching debt.

Many of these changes will make it look as though universities’ surpluses have declined when in terms of cash flow, nothing will have changed.

Surpluses will also be made more volatile by the proposal that capital grants be booked in full as income once each new building they fund is complete (currently they are spread over the buildings’ lifetimes). At the University of Exeter, for example, this means that a yearly £8 million “accounting credit” will suddenly disappear from our annual surplus.

It is difficult to see what practical benefit this change will serve, especially if it causes bankers and investors – not to mention regulators, staff, trade unions and students – to perceive a fall in financial performance where one does not really exist.

Historically, higher education has been a safe bet for investors. But volatile results and smaller balance sheets will only fuel the smouldering unease caused by the coalition government’s market-driven higher education reforms, which have been interpreted as increasing the risk of university mergers and even insolvencies. There is a possibility that banks will become less willing to lend to universities at favourable rates.

The accounting changes may also breach some existing lending agreements between universities and banks. Banks, eager to reprice their low-margin loan facilities, could seize this as an opportunity to renegotiate terms and conditions to their advantage – although the British Universities Finance Directors Group has already engaged with the main lenders to try to head this off.

The sector can’t say it has not been warned. The Sorp Board began planning for the changes in 2010 and has worked closely with the BUFDG to engage the universities. However, it hasn’t helped that the Financial Reporting Council has issued no fewer than five consultations on the reforms.

It is clear that once the rules are finalised, senior university managers will have a major role to play in communicating the accounting changes and making sure that universities’ 2015-16 financial results are seen internally and externally for what they are. Getting the accounting entries right will be the (relatively) easy bit: managing the views of stakeholders is going to be a lot harder.

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