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Over the weekend the ESFA published the Academies Financial Handbook 2018 (AFH2018) and this will replace the 2017 version with effect from 1 September 2018. A full copy of the Handbook can be found here.

Key changes in the Academies Financial Handbook 2018

So what has changed from the 2017 edition? The changes range from small clarifications to hitting the topics that often make headlines. Once again, the ESFA has helpfully summarised the changes (pages 6 and 7) so that they can be easily identified. Below Kreston Reeves have looked at these changes and highlighted the key changes that will have more of an impact upon academy trusts.

Financial Control

A topic known to cause headlines is related party transactions. These transactions continue to be of keen interest to the ESFA and this is one of the key changes of the AFH2018.

To start simply, the ESFA have changed the terminology from connected party to the more conventional term of related party. The good news is this has had no impact on the definition that continues to be:

  • any member or trustee of the academy trust.
  • any individual or organisation related to a member or trustee of the academy trust. For these purposes the following persons are related to a member, or trustee:

► a relative of the member or trustee.

► an individual or organisation carrying on business in partnership with the member, trustee or a relative of the member or trustee.

► a company in which a member or the relative of a member (taken separately or together), and/or a trustee or the relative of a trustee (taken separately or together), holds more than 20% of the share capital or is entitled to exercise more than 20% of the voting power at any general meeting of that company.

► an organisation which is controlled by a member or the relative of a member (acting separately or together), and/or a trustee or the relative of a trustee (acting separately or together).

► any individual or organisation that is given the right under the trust’s articles of association to appoint a member or trustee of the academy trust; or anybody related to such individual or organisation.

► any individual or organisation recognised by the Secretary of State as a sponsor of the academy.

  • Key Change! – The AFH2018 now states that trusts must report all transactions with related parties to the ESFA in advance of the transaction taking place using an online form where they exceed the preset limits. (3.10.4, 3.10.6 and 3.10.7).

What are the limits for reporting? Trusts must obtain prior approval from the ESFA for contracts for the supply of goods or services to the trust by a related party where:

  • the contract exceeds £20,000.
  • a contract of any value that would take the total value of contracts with the related party beyond £20,000.
  • a contract of any value if there have been contracts exceeding £20,000 individually or cumulatively with the related party in the same financial year ending 31 August.

Trusts must also obtain ESFA’s approval for transactions with related parties that are novel, contentious and/or repercussive. The definition of this included below:

  • Novel transactions are those of which the academy trust has no experience, or are outside its range of normal business.
  • Contentious transactions are those that might cause criticism of the trust by Parliament, the public or the media.
  • Repercussive transactions are those likely to cause pressure on other trusts to take a similar approach and hence have wider financial implications.

The approval process is not intended to capture staff remuneration. For the purposes of reporting to, and approval by, ESFA, transactions with related parties do not include salaries and other payments made by the trust to a person under a contract of employment through the trust’s payroll.

Key Change! – The AFH2018 has now strengthened expectations about the process for setting executive pay (2.4.4).

It has built upon the requirements within the 2017 handbook by stating that:

The board must discharge its responsibilities effectively, ensuring its approach to pay is transparent, proportionate and justifiable, including:

  • process - that the procedure for determining executive pay is agreed by the board in advance and documented.
  • independence - decisions about executive pay reflect independent and objective scrutiny by the board and that conflicts of interest are avoided.
  • decision-making - factors in determining pay are clear, including whether performance considerations, and the degree of challenge in the role, have been taken into account.
  • proportionality – pay is defensible relative to the public sector market.
  • documentation - the rationale behind the decision-making process, including whether the level of pay reflects value for money, is recorded and retained.
  • a basic presumption that non-teaching pay should not increase at a faster rate than that of teachers, in individual years and over the longer term.
  • understanding that inappropriate pay can be challenged by ESFA, particularly in any instance of poor financial management of the trust.

Governance

The changes in this area seek to reinforce boards’ responsibilities for effective oversight and robust challenge.

  • Greater emphasis on trustees applying high standards of governance, the role of the chair, working with ESFA, and updated references to church academies (1.3.1 to 1.3.5).

Whilst the role of a trustee remains unchanged the AFH2018 has further clarified their duties. 1.3.3 states that trustees must apply the highest standards of governance and take full responsibility of their duties.

Boards are still required to meet at least three times a year. But the AFH2018 has added in the following:

  • explaining reporting requirements if the board meets less than six times a year (2.1.2).

What this means is where boards meet less than six times a year they must describe in the governance statement in the accounts how it maintained effective oversight of funds with fewer meetings.

As budgets become tighter, cash management will be a key focus for trusts and this has been recognised by the ESFA:

  • Confirming that trusts must apply robust cash management (2.3.5).

The wording in this section has been strengthened from a should to a must requirement. The trust must mange it cash position robustly. It may be required to report to the ESFA on the cash position where there are concerns about financial management.

With regard to budget setting the wording has again been strengthened to promote greater governance. The board of trustees, and any separate committee responsible for finance, must ensure rigour and scrutiny in budget management. In order to do so they have:

  • Set clearer requirements for budgeting (2.3.2 and 2.3.3).
  • Key Change! – The AFH2018 now states that the board must ensure that budget forecasts, for the current year and beyond, are compiled accurately, based on realistic assumptions including any provision being made to sustain capital assets, and are reflective of lessons learned from previous years. (2.3.3).

This will include challenging assumptions, especially pupil numbers which drive revenue projections.

  • Key Change! – The AFH2018 now states the trust must prepare management accounts every month setting out its financial performance and position, comprising budget variance reports and cash flow forecasts with sufficient information to manage cash, debtors and creditors(2.3.3).

  • Key Change! – The AFH2018 now states that management accounts must also be shared with the chair of trustees every month irrespective of the size of the trust, and with the other trustees six times a year. The board must ensure appropriate action is being taken to maintain financial viability including addressing variances between the budget and actual income and expenditure.

Key Change! – The AFH2018 now states that The trust must select key financial performance indicators and measure its performance against them regularly, including analysis in its annual trustees’ report as explained in the Accounts Direction.

Whilst this will have also been considered best practice, these will now be mandatory.

Financial returns

Annually the ESFA sends letters to trusts’ Accounting Officers/CEOs which cover issues pertinent to their role and the ESFA’s findings. A full bank of the latest and previous “Dear Accounting Officer” letters can be found here. The topic of the latest letter was deadlines for returns and a firmer stance on non-compliance.

Key Change! – The AFH2018 now states that where information is not received by the deadline or not of acceptable quality the ESFA may conduct investigations to collect it. The ESFA may then deduct the cost of the investigations from the trust’s recurrent funding (4.8.4).

With budgets stretched and the costs of the investigations unknown, academy trusts cannot afford to be missing deadlines or providing poor quality returns.

Summary

Some key changes in areas that have in the past caused media attention for academy trusts along with some strengthening of governance procedures from best practice to mandatory. The ESFA continues to strive for the highest standards of financial management and governance.

We would recommend that the AFH 2018 is read by all those involved in making the decision on behalf of the trust, in particular, Annex B: Schedule of freedoms and delegations and Annex C: The Musts – otherwise, are you demonstrating strong governance and financial management?

Make sure you pre-order your complimentary copy of Kreston's Academies Benchmark Report 2019 here: http://eepurl.com/ge8wvr

This year the report includes over 350 Trusts representing nearly 1000 schools and is based on those Academies that prepared financial statements for the period ended 31 August 2018 and which were audited by member firms of Kreston UK.

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