Ask the Auditor: School assets and your balance sheet

Following CIPFA’s November local authority conferences, Graham Liddell from Grant Thornton UK LLP provides an updated assessment of the issues faced by local authorities  considering whether to recognise school buildings on their balance sheets. To ask Graham a technical query, email editor@room151.co.uk

Since I wrote last month’s article on school assets, there has been lots of debate on the issues I described as ‘potential complications’. In particular, there is still no consensus on how to deal with school buildings at voluntary aided, voluntary controlled schools and foundation schools:

–          in our discussions with local authorities and other audit firms we have heard some strong arguments for local authorities to recognise voluntary aided, voluntary controlled and foundation school buildings on their balance sheets

–          at its November conferences, CIPFA indicated that it had reached a different conclusion and expects most voluntary aided, voluntary controlled school buildings and some foundation school buildings not to be recognised on local authority balance sheets.

There is, however, one bit of good news. We understand that the Code will be updated so that local authorities bringing school assets on to their balance sheet at 1 April 2013 will do so at ‘deemed cost’. This means that there will be no need to go back to 1 April 2008 to determine the split between the capital adjustment account and the revaluation reserve: the full credit entry for any assets coming on to the balance sheet on 1 April 2013 will be to the capital adjustment account.

Over the last few weeks, we at Grant Thornton have been working with the Audit Commission and the other audit firms to gain an understanding of CIPFA’s views. We are also working with local authorities to identify the practical implications. CIPFA has not yet committed to how or when it will issue its final guidance on  the matter.  I have, however, set out the latest position as I understand it in this blog.

The principles for recognising school buildings

The first stage in accounting for schools is to consider the school as an entity. From 2014/15 the income, expenditure, assets and liabilities of each school will be ‘consolidated’ into the local authority single entity accounts.

The key consideration  therefore, is whether  the school buildings are assets of the school. The answer depends not just on the legal ownership of the buildings but also on the circumstances under which schools occupy them, including their rights and obligations.

This judgement is made by applying the relevant accounting standard as adapted by the Code. The key relevant standards for recognising school buildings are:

–          IAS 17 (leases) and

–          IAS 16 (property, plant and equipment)

Voluntary aided and voluntary controlled schools

For voluntary aided and voluntary controlled schools, CIPFA’s view that the local authority should not recognise the school buildings in its balance sheet is driven by its understanding that religious bodies with legal ownership of the buildings have a legal right to take them back. CIPFA considers this to be equivalent to an operating lease and therefore that the building is not an asset of the school. However, we have not, at this stage, seen CIPFA’s detailed considerations to support this conclusion.

Together with the other audit firms, we have emphasized that we would expect any guidance to local authorities to set out:

–          the factors that  should  consider in determining which standard to apply

–          where IAS 17 applies, the factors that authorities would be expected to consider in determining whether the school has a finance or operating lease

–          where IAS 16, applies, how local authorities would be expected to apply the IAS 16 recognition criteria (critically, whether it is probable that the economic benefits and service potential of the buildings will flow to the school).

We have also emphasised that  any guidance to local authorities should consider the substance of the arrangement as well as the legal form. For example:

–          the circumstances in which the third party could and would any rights to take back the school buildings

–          what indicators there are that the third party is likely to exercise its rights to take back the buildings.

Foundation schools

The principles for determining whether foundation schools are on or off the balance sheet are the same as for voluntary aided and voluntary controlled schools but there is general consensus that many foundation schools will be recognised on  local authority balance sheets, However, we and CIPFA are aware that there are a variety of models for how buildings are made available to foundation schools. This means that local authorities will need to consider foundation school buildings on a case by case basis.

Practical issues

We recognise the challenges faced by local authorities in applying the 2014/15 Code and the frustrations of waiting for guidance. Over the last few weeks our local auditors and our national technical team have been running workshops and meeting  accountants and valuers to try to help local authorities address these issues. The key messages are as follows:

–          we have been pleased to see that some local authorities have made good progress in gaining an understanding of the arrangements in place for third parties providing buildings to schools. The best placed local authorities are those that have considered:

o   the rights and obligations of the body making the school building available to the school

o   the rights and obligations of the school and the local authority in respect of the school buildings

o   the circumstances in which the school buildings might be taken back by the legal owner, including an understanding of how likely it is for these circumstances to arise

–          a key decision is about whether to commission valuation reports on school buildings. CIPFA has publically expressed its view that local authorities need to be wary about carrying out valuations that prove to be unnecessary. We endorse this advice but note that local authorities will also need to consider:

o   whether there are any school buildings for which the decision to recognise on the balance sheet is clear cut

o   the extent to which costs of carrying out valuations have already been committed

o   the capacity of valuers to carry out valuations in time for the preparation of the 2014/15 financial statements, should large number of school buildings need to be recognised on the local authority’s balance sheet.

–          not all local authorities have made progress in addressing other practical issues affecting schools arising from changes to the 2014/15 Code:

o   as noted above the first stage in bringing school income, expenditure, assets and liabilities into the local authority accounts is to treat the school as an entity

o   this means that local authorities will need to be satisfied that, for each school, they have captured all the financial information relating to the school as an entity. This will include considering how local authorities will obtain assurance over the completeness of school:

• income (including voluntary donations to the school)
• expenditure (including salaries expenditure made out of voluntary donations)
• assets (including office equipment, minibuses and endowment funds)
• liabilities (including locally agreed leasing arrangements)

And in conclusion

We recognise that these are complex issues and it is difficult for local authorities to reach firm conclusions until further information and guidance is available. However, there is much that local authorities can do now. Please keep talking to your auditors and looking out for any further information from CIPFA. I will post further updates as I hear more.

Graham Liddell is Grant Thornton UK LLP’s national technical lead for the public sector. No responsibility or liability is accepted by Grant Thornton UK LLP towards any person or organisation in respect of the use of, or reliance on, information contained in this column. 

Photo: (cropped) “Classroom Plastic Wooden Desks” by Christopher Sessums is licensed under CC BY 2.0