Tuesday, August 27, 2013

Hope for sixth form colleges on VAT? Or just a little more honesty?

Today’s Guardian online and tomorrow’s paper carries an article about sixth form colleges: overachieving but underfunded by Harry White. The piece highlighted the funding inequities suffered by SFCs.

The article included a quote from a Department for Education spokesperson:

Colleges are treated differently to schools when it comes to VAT because of their legal status. We are looking into whether funding arrangements should be reviewed to take this into account.

Basically that recognises that SFC bear VAT on their purchases whereas schools do not.

There are no plans to allow sixth form colleges to waive VAT on purchases. They ar required to pay VAT on their purchases, in common with everyone else. The basic funding principle for sixth form colleges is that these VAT costs are taken into account as part of the up-front funding allocation.

I am not expecting any U-turn but there is now a more honest appraisal of the situation coming out of the Department for Education.

Tuesday, August 06, 2013

Governance of social landlords – themes in a tagcloud

Since the Homes and Communities Agency (HCA) has taken over social housing regulation, there have been some eye-catching Regulatory Judgements (RJs). In seven cases social landlords have been graded as weak with a G3 or G4 (see Footnote).

Hopefully in there will be detailed work on these and other social landlords in with governance difficulties. In the past there was the Problem Cases trilogy – research by the Housing Corporation and consultancy CampbellTickell on housing associations who had been placed in regulatory supervision. Perhaps in the age of austerity there will be no funding for looking at case studies of failure.

While we wait for more detailed research we might be able to visualisation techniques to pull out some of the themes from the first seven social landlords to get G3 or G4 in their RJs. With a population of seven, the statistical significance will be limited. Nevertheless, the TagCloud does highlight issues like development. Also, the TagCloud shows the importance of frameworks for risk management and assurance for governance. As the HCA churns out more RJs, TagClouds may prove more instructive.


G3 = The provider does not meet all of the requirements on governance set out in the Governance and Financial Viability standard. There are issues of regulatory concern and in agreement with the regulator the provider is working to improve its position.

G4 = The provider does not meet the requirements on governance set out in the Governance and Financial Viability standard. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

Thursday, August 01, 2013

Colleges face yo-yoing bottom lines with proposed accounting rules

There might be a few green shoots of recovery for UK plc but public services are set for austerity up to at least 2018. The college sector has felt the pressure of being outside the funding ring-fence protecting pre-16 education. In the middle of this decade, many colleges will take another set of blows with National Insurance increasing and Formula Protection funding ending in 2016. Like buses coming in threes, the college sector has another prospective blow – a new accounting Statement of Recommended Practice (SORP) for Further and Higher Education which radically (and adversely) changes the way that capital grants are treated.

The draft SORP has not yet been issued but we know what it will propose for college accounts from 2015/16 onwards. The SORP consultation website already outlines the changes on capital grants:

The revenue recognition rules will result in most capital grants being credited to the Income Statement, rather than to deferred capital grants on the balance sheet. Deferred capital grants recorded on balance sheets, and their subsequent release to the I&E Account, will no longer occur.

This change will result in more volatile surpluses and deficits.

Future Income Statements will no longer benefit from the credit arising from the release of deferred capital grants (currently c£xm per year), which will reduce on-going reported surpluses.

Whereas now capital grants are released as income gradually over the life of the buildings or other assets which they funded to offset the depreciation cost of the assets, under the SORP the capital grant is recognised as income in one go with the depreciation hitting the bottom line year after year until the asset is fully depreciated. The resulting volatility will be seen in ridiculously large surpluses coming along when a college gets a capital grant but then many years of surpluses being much lower (or deficits much higher) than otherwise.

Sometimes the size and/or frequency of those deficits will mean that colleges breach the financial performance requirements of the covenants on their loan agreements. Since the credit crunch it can be very costly to upset bankers – a covenant breach means that a loan is (theoretically) repayable immediately and, in practical terms, the interest rate can be cranked up.

What will this mean in practical terms? How volatile will the proposed SORP requirements make bottom lines? It’s hard to say exactly without a crystal ball. However, we can look at the most recently available college accounts for some idea of what this means.

In 2011/12 the operating surplus for the whole of the college sector was £141 million – the value of the capital grant releases was £143 million. So these capital grant releases are significant for the further education and sixth form colleges taken as a whole. But what about individual colleges?

In total there were 74 colleges with operating surpluses had capital grant releases larger than these surpluses. In most of these cases the SORP treatment would have led to an operating surplus. A similar number of colleges already in deficit would have had a much operating deficits.

One London college had an operating deficit of £193k in 2011/12 but the value of its capital grant releases was £2.6 million. Another college in the south east had a surplus of £53k in 2011/12 after benefiting from capital grant releases of £2.3 million.

Colleges will have different loan covenants to comply with. But the SORP changes are a nasty shock to even colleges with relatively permissive covenants dating from before the credit crunch.

This amounts to a ticking bomb under the college sector unless the drafters of the SORP can be persuaded to change their minds by the consultation period ending in October.