Statement of principal accounting policies
STATEMENT OF PRINCIPAL ACCOUNTING POLICIES
The following accounting policies have been applied consistently in dealing with items which are considered materialin relation to the financial statements.
(A) Basis of preparation (including going concern assessment
The financial statements have been prepared in accordance with the Statement of Recommended Practice:Accounting for Further and Higher Education 2019 (SORP 2019) and in accordance with Financial ReportingStandard (FRS) 102 and with the Accounts Direction issued by the Scottish Funding Council.
The University is a public benefit entity and therefore has applied the relevant public benefit requirement ofFRS 102. The financial statements have been prepared under the historical cost convention, as modified bythe revaluation of land and buildings.
The functional currency of the University is pounds sterling, and the financial statements have been preparedto round 贈000s.
The financial statements have been prepared on a going concern basis. The University and Groups activities,financial performance and financial position, together with factors likely to affect its future development andperformance, are described in the Strategic Report. Emerging and principal risks and uncertainties facing theUniversity are described on page 5. At 31 July 2020, the University held gross cash of 贈8.8 million (2019 grosscash of 贈8.1 million), while net current assets were 贈4.0 million. At 31 January 2021 the University held 贈13.5million of gross cash.
The only external borrowings of the University at 31 July 2020 were debt with a balance of 贈29.1 million, comprising covenanted debt with Barclays Bank plc. Between 1 August and 31 January 2021, 贈0.7 million hadbeen repaid in accordance with loan agreements. A further 贈1.5 million of borrowings will be repayable duringthe going concern period, which runs for a 12-month period from the date of approval of these financialstatements to February 2022.
In light of the unprecedented nature of the COVID-19 pandemic and its potential impacts on funding and keyincome streams, there has been significantly increased focus on the area of going concern. The going concernassessment included consideration of:
- the current and developing environment in which the University and Group operates;
- the Universitys liquidity through the assessment period demonstrated through a detailed monthly cash flow forecast throughout the assessment period;
- key assumptions made by management around the future financial performance of the University, in particular:
- assumptions around future student intake, in particular EU students, for both 2021/22 and the following academic year;
- assumptions around other income streams for both 2020/21 and the following academic year,
concerning English Language Teaching income and reduced income from accommodation; and
- assumptions around other key cashflows over the review period.
- evidence of compliance with loan covenants at 31 July 2020 and forecast compliance with loan covenants through the going concern period, specifically at 31 July 2021, and subsequent mitigations should there be a breach.
Management has modelled a severe but plausible downside scenario based on extended periods of disruptionresulting from COVID-19 and the related impacts on tuition fees, other income, increases in COVID-19 relatedexpenditure and bad debt, and before any mitigating actions are taken by management. In this scenario, theUniversity and Group is still forecasting material liquidity throughout the going concern assessment period toFebruary 2022, with minimum liquidity headroom throughout the period of 贈5.1 million at February 2022.
The scenario outlined above would result in the University and group running down its liquidity to a level below贈5 million, the minimum level of cash required to ensure compliance with bank covenants, in March 2022, onemonth after the going concern period. Should the Universitys financial position through the going concern period deteriorate in line with the downside scenario outlined or worse, management will make use of thefollowing mitigations to address this in advance of it running out of cash
1. Further reducing maintenance costs to the value of 贈0.5 million.
2. A reduction in staff costs through a recruitment freeze to the value of 贈0.1 million.
3. A reduction in cleaning, maintenance and utilities costs for the accommodation block to the value of 贈0.2million (to reflect reduced occupancy of the student accommodation during semester and during the summerperiod).
4. Removing temporary accommodation staff costs to the value of 贈0.1 million (to reflect the loss of incomefrom summer accommodation letting business).
The University borrowings listed above are subject to covenant terms. The University was fully compliant withthose covenant terms during the year to 31 July 2020. In response to the significant uncertainties arising as aresult of the COVID-19 pandemic, the University entered discussions with its lender regarding amendment ofcovenant terms, and reached agreement on revised covenants on 27 January 2021 for the covenants beingmeasured at 31 July 2021, the only measurement point in the going concern assessment period. TheOperational Leverage Covenant has been revised, which is the ratio of borrowing at the end of each relevantperiod to adjusted operating surplus or deficit. Based on the plausible worst case scenario outlined above, theUniversity forecasts headroom against the most stringent covenant of 贈0.5 million at 31 July 2021. It alsoforecasts compliance with the remaining covenants at 31 July 2021.
Future viability
The University is continuing to monitor its forecast compliance with covenants including at the next keymeasurement date after the going concern period at 31 July 2022, including under the plausible worst casescenario. Should this scenario be realised, in particular in respect of significantly reduced student recruitmentand residences occupancy in the 2021/22 academic year, management is confident that there are sufficientmitigating actions within the Universitys control that would offset this reduced income to ensure compliancewith future loan covenants, before the requirement for further renegotiation of covenants with its lender.
Based on the assessment outlined above, the University has concluded that it has adequate resources tocontinue in operation for at least 12 months from the approval of these financial statements and for this reasonthe going concern basis continues to be adopted when preparing the financial statements.
(B) Basis of consolidation
The consolidated financial statements include the University and its subsidiary undertaking for the financialyear ended 31 July 2020. Details of 91心頭 Enterprises are given in note 13. Intra-group transactions areeliminated on consolidation. Amounts in relation to debts and claims between undertakings included in theconsolidation are also eliminated.
The consolidated financial statements do not include the results of the 91心頭 StudentsUnion on the grounds that it is a separate legal entity in which the University has no financial interest andexerts no control or significant influence over policy decisions.
(C) Recognition of income
Tuition fee income is stated gross of any expenditure, which is not a discount and is credited to theConsolidated Statement of Comprehensive Income & Expenditure over the period during which students arestudying. Where the amount of the tuition fee is reduced by a discount for prompt payment, income receivableis shown net of the discount. Bursaries and scholarships are accounted for gross as expenditure and are notdeducted from income.
Income from the sale of goods and services is credited to income in the year in which the goods or servicesare supplied to the customer or the terms of the contract have been satisfied.
Investment income is credited to income on a receivable basis.
Funds which the University receives and disburses as paying agent on behalf of a funding body or other body,where the institution is exposed to minimal risk or enjoys minimal economic benefit related to the receipt andsubsequent disbursement of funds, are excluded from the income and expenditure of the University.
Grant funding
Recurrent grants from the Scottish Funding Council are credited to income in the period in which they arereceivable. Non-recurrent grants and donations are recognised when they are receivable and whenperformance conditions have been met. Income received in advance of performance conditions being met isincluded in creditors as deferred income. Where there are no performance conditions, income is recognisedwhen it is receivable.
Donations and endowments
Donations and endowments with donor-imposed restrictions are recognised as income when the University isentitled to the funds. Income is retained within the restricted reserve until such time as it is utilised in line withsuch restrictions, at which point the income is released to the general reserve through a reserve transfer.Donations with no restrictions are recognised as income when the University is entitled to the funds.
Capital grants
Government capital grants are recognised as income over the expected useful life of the asset. Other capitalgrants are recognised as income when the University is entitled to the funds subject to any performance relatedconditions being met.
(D) Accounting for retirement benefits
Retirement benefits for employees of the University are provided by the Local Government Pension Scheme(LGPS) through the Lothian Pension Fund, the Scottish Teachers Pension Scheme (STPS) and theUniversities Superannuation Scheme (USS). All three are defined benefit schemes.
Local Government Pension Fund
The Lothian Pension Fund is a funded multi-employer defined benefit scheme, with the assets held in aseparate trustee-administered fund to meet long-term pension liabilities to past and present employees. TheUniversity recognises a liability for its share of obligations under the scheme net of its share of plan assets.This net defined benefit liability is measured as the estimated amount of benefit that employees have earnedin return for their service in current and prior periods, discounted to determine its present value, less the fairvalue (at bid price) of plan assets. The fund is valued every three years by professionally qualified independentactuaries using the projected unit credit method. Where the calculation results in a net asset, recognition ofthe asset is limited to the extent to which the University is able to recover its share of the surplus, either throughreduced contributions in the future or through refunds from the plan. In calculating the amount of the provisionat 31 July 2020, the assumptions used in calculating the McCloud element of the liability have been refinedbased on the most recent data available. This has led to an increase in the liability and the expense of贈275,000.
Scottish Teachers Pension Scheme
The STPS is an unfunded multi-employer defined benefit scheme. Contributions are credited to the Exchequer,and the Exchequer effectively meets the costs of all benefits. The scheme is financed by payments fromemployers and from those current employees who are members of the scheme and who pay contributions atprogressively higher marginal rates based on pensionable pay, as specified in the regulations. The rate ofemployer contributions is set with reference to a funding valuation undertaken by the scheme actuary. TheUniversity is unable to identify its share of the underlying assets and liabilities of the scheme. Accordingly, theUniversity has accounted for its contributions as if it were a defined contribution scheme. The University hasno obligation for other employers obligations to the multi-employer scheme.
Universities Superannuation Scheme
The Universities Superannuation Scheme is a hybrid pension scheme, providing defined benefits (for allmembers), as well as defined contribution benefits. The assets of the scheme are held in a separate trustee administeredfund. Because of the mutual nature of the scheme, the assets are not attributed to individualinstitutions and a scheme-wide contribution rate is set. The University is therefore exposed to actuarial risksassociated with other institutions employees and is unable to identify its share of the underlying assets andliabilities of the scheme on a consistent and reasonable basis. As required by Section 28 of FRS 102(Employee Benefits), the University therefore accounts for the scheme as if it were a wholly definedcontribution scheme. As a result, the amount charged to the income and expenditure account represents thecontributions payable to the scheme in respect of the accounting period. Since the University has entered intoan agreement (the Recovery Plan) that determines how each employer within the scheme will fund the overalldeficit, the University recognises a liability for the contributions payable that arise from the agreement (to theextent that they relate to the deficit) and therefore an expense is recognised in the income and expenditureaccount.
Enhanced pension benefits
In a number of instances, the University has agreed to provide enhanced pension benefits in respect ofmembers of staff taking early retirement. These additional benefits are unfunded and are charged, as andwhen they arise, against a provision established when members retire to meet this liability. This provisionrelates to former members of staff who are members of the STSS and a small number of staff in receipt of exgratiapension payments from the University.
(E) Employment benefits
Short-term employment benefits such as salaries and compensated absences are recognised as an expensein the year in which the employee renders service to the University. Any unused benefits are accrued andmeasured as the additional amount that the University expects to pay as a result of the unused entitlement.
(F) Leases and hire purchase contracts
Leasing agreements which transfer to the University substantially all the benefits and risks of ownership of anasset are treated as if the asset had been purchased outright. The assets are included in fixed assets and thecapital elements of the leasing commitments are shown as obligations under finance leases. The lease rentalsare treated as consisting of capital and interest elements. The capital element is applied in order to reduceoutstanding obligations and the interest element is charged to the income and expenditure account inproportion to the reducing capital element outstanding. Assets held under finance leases are depreciated overthe shorter of the lease term or the useful economic lives of equivalent owned assets.
(G) Foreign currency translations
Assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at theend of the financial year, with all resulting exchange differences being taken to the income and expenditureaccount in the year in which they arise.
(H) Fixed assets
Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Certainitems of fixed assets which had been revalued to fair value on or prior to the date of transition to SORP 2015are held on a basis of fair value cost, being the revalued amount at the date of that valuation. Where parts ofa fixed asset have different useful lives, they are accounted for as separate items of fixed assets.
Land and Buildings are stated at cost or valuation. Land and Buildings are externally valued every five years.The basis of valuation is depreciated replacement cost. In the period between external valuations theUniversity Court reviews the value of the assets. Where the value of the Land and Buildings is considered tobe below cost, either by external valuation or as a result of the Courts review, and this is considered to be apermanent diminution in value, the difference is charged to the income & expenditure account as animpairment charge. The part of the University campus comprising the academic buildings was revalued at 31July 2020 by Gerald Eve, Chartered Surveyors. The basis of the valuation, which was carried out in accordancewith guidelines issued by the Royal Institution of Chartered Surveyors, is depreciated replacement cost.
The heritable properties comprising the 91心頭 Student Village were valued as at 31 July2020 by, Gerald Eve LLP, a regulated firm of Chartered Surveyors. The valuation was prepared in accordancewith the requirements of the RICS Valuation - Global Standards (July 2017 edition) and Financial ReportingStandard 102 and the 2019 Statement of Recommended Practice 'Accounting for Further and HigherEducation'. The valuation was undertaken on a Fair Value basis, equated to Market Value on the assumptionof a continuation of the existing use.
Costs incurred in relation to a tangible fixed asset after its initial purchase or production are capitalised to theextent that they increase the expected future benefits to the University from the existing tangible fixed assetbeyond its previously assessed standard of performance. The cost of routine maintenance is not capitalised,but is charged to the income and expenditure account in the year in which it is incurred.
Heritable land is not depreciated. Heritable buildings are depreciated on a straight line basis over theirexpected useful lives of between 10 and 50 years. No depreciation is charged on assets in the course ofconstruction.
Equipment, including computer equipment and software, costing less than 贈10,000 per individual item or groupof related items is written off in the year of acquisition. All other equipment is capitalised and depreciated on astraight line basis over periods ranging from three to five years, being its expected useful life. A full yearsdepreciation charge is made in the year of acquisition of the item of equipment.
(I) Investments
Investments in subsidiaries are shown at cost. Current asset investments are held at fair value with anymovements recognised in the surplus or deficit.
(J) Cash and cash equivalents
Cash includes cash in hand, deposits repayable on demand and overdrafts. Deposits are repayable ondemand if they are in practice available within 24 hours without penalty. No investments, however liquid, areincluded as cash. Liquid resources comprise assets held as a readily disposable store of value. They includeterm deposits, government securities and loan stock held as part of the Universitys treasury managementactivities.
(K) Provisions, contingent liabilities and contingent assets
Provisions are recognised when the University has a present legal or constructive obligation as a result of apast event, it is probable that an outflow of economic benefits will be required to settle the obligation and areliable estimate can be made of the amount of the obligation. The amount recognised as a provision isdiscounted to present value where the time value of money is material. The discount rate used reflects currentmarket assessments of the time value of money and reflects any risks specific to the liability.
A contingent liability arises from a past event that imposes upon the University a possible obligation, theexistence of which will only be confirmed by the occurrence or otherwise of uncertain future events not whollywithin the control of the University. A contingent liability may also arise in circumstances where a provisionwould otherwise be made but either it is not probable that an outflow of resources will be required or wherethe amount of the obligation cannot be measured reliably.
A contingent asset arises where an event has taken place which entitles the University to a possible asset, theexistence of which will only be confirmed by the occurrence or otherwise of uncertain future events not whollywithin the control of the University. Contingent assets and liabilities are not recognised in the Balance Sheetbut are disclosed by way of a note.
(L) Taxation
The University is an exempt Charity within the meaning of the Trustee Investment and Charities (Scotland) Act2005, and as such is a charity within the meaning of section 506(1) of the Income and Corporation Taxes Act1988. The University is recognised as a charity by HM Revenue & Customs and is recorded on the index ofcharities maintained by the Office of the Scottish Charity Regulator. It is therefore a charity within the meaning of Para 1 of schedule 6 to the Finance Act 2010 and accordingly, the University is potentially exempt fromtaxation in respect of income and capital gains received within categories covered by sections 478 to 488 ofthe Corporation Tax Act 2010 or section 256 of the Taxation of Chargeable Gains Act 1992, to the extent thatsuch income or gains are applied exclusively for charitable purposes.
The University receives no similar exemption in respect of Value Added Tax (VAT). Irrecoverable VAT arisingfrom expenditure on non-trading activities is charged to the income and expenditure account. Any irrecoverableVAT allocated to fixed assets is included in their cost.
(M) Reserves
Reserves are classified as either restricted or unrestricted. Restricted endowment reserves include balanceswhich, through endowment to the University, are held as a permanently restricted fund which the Universitymust hold in perpetuity. Other restricted reserves include balances where the donor has designated a specificpurpose and therefore the University is restricted in the purposes for which it may use these funds.The policy is to revalue the estate every 5 years, and any surplus arising is added to the revaluation reserve.
(N) Judgements and key sources of estimation uncertainty
The preparation of the financial statements requires management to make judgements, estimates andassumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and theamounts reported for revenues and expenses during the year. It is the view of the directors that there are nosignificant or material accounting judgements. The following are the key sources of estimation uncertainty:
Pension and other post-employment benefits
The cost of defined benefit pension plans and other post-employment benefits are determined using actuarialvaluations. The actuarial valuation involves making assumptions about discount rates, future salary increases,mortality rates and future pension increases. Due to the complexity of the valuation, the underlyingassumptions and the long term nature of these plans, such estimates are subject to significant uncertainty. Indetermining the appropriate discount rate, management considers the interest rates of corporate bonds in therespective currency with at least AA rating, with extrapolated maturities corresponding to the expected durationof the defined benefit obligation. The underlying bonds are further reviewed for quality, and those havingexcessive credit spreads are removed from the population bonds on which the discount rate is based, on thebasis that they do not represent high quality bonds. The mortality rate is based on publicly available mortalitytables for the specific country. Future salary increases and pension increases are based on expected futureinflation rates for the respective country. Further details are given in note 21 to the financial statements.
Valuation of land and buildings
The part of the University campus comprising the student accommodation was revalued at 31 July 2020 byGerald Eve, Chartered Surveyors. The valuation was prepared in accordance with the requirements of theRICS Valuation - Global Standards (July 2017 edition) and Financial Reporting Standard 102 and the 2019Statement of Recommended Practice 'Accounting for Further and Higher Education'. The valuation wasundertaken on a Fair Value basis, equated to Market Value on the assumption of a continuation of the existinguse. This exercise resulted in a revaluation loss of 贈4.314 million, which has been reflected in the financialstatements. The valuation took into account the impact of the COVID-19 pandemic on the short-term reductionin the ability to generate income from summer letting activities.
The part of the University campus comprising the academic buildings was revalued at 31 July 2020 by GeraldEve, Chartered Surveyors. The basis of the valuation, which was carried out in accordance with guidelinesissued by the Royal Institution of Chartered Surveyors, is depreciated replacement cost. This exercise resultedin a revaluation gain of 贈9.486 million, which has been reflected in the financial statements.
Management has considered the basis used to undertake both valuations and has satisfied itself that the basis,and the resulting valuations, are reasonable.
The net revaluation gain arising out of the two valuations was 贈5.172 million.
Consideration has been given to the effects of the COVID-19 pandemic on the Universitys property assetsand their associated values. The COVID-19 outbreak is a global pandemic that has affected all parts of theglobal community. It is a fast-changing, fluid situation, with government recommendations and requirementsbeing reviewed and updated on an ongoing basis. Many business sectors have been forced to close as partof government restrictions to reduce the spread of the virus, and the full effects of the virus on property marketsand the wider economy are yet to be fully understood, assessed or quantified. Currently, there is insufficientempirical data available to make an informed and evidence-based decision on whether or not there has beena significant impact on asset valuations. Occupancy levels, rental figures, land values and BCIS costs andindices will all require to be monitored and reviewed going forward to assess the full impact of the COVID-19outbreak on asset valuations. In light of the foregoing, it is considered appropriate to include the followingRCIS-approved Material Valuation Uncertainty statement.
Material Valuation Uncertainty Statement
The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a GlobalPandemic on the 11th March 2020, has impacted global financial markets. Travel restrictions have beenimplemented by many countries. Market activity is being impacted in many sectors. As at the valuation date,in terms of the non-residential accommodation, we consider that we can attach less weight to previous marketevidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19means that we are faced with an unprecedented set of circumstances on which to base a judgement. GeraldEve have therefore indicated that their valuations, upon which management has relied, are reported as beingsubject to material valuation uncertainty as set out in VPS 3 and VPGA 10 of the RICS Valuation GlobalStandards. Consequently, less certainty and a higher degree of caution should be attached to thevaluations than would normally be the case. Given the unknown future impact that COVID-19 might have onthe real estate market, the valuation of these properties will be kept under frequent review.
For the avoidance of doubt, the inclusion of the material valuation uncertainty declaration above does notmean that the valuation cannot be relied upon. Rather, the declaration has been included to ensuretransparency of the fact that in the current extraordinary circumstances less certainty can be attached tothe valuation than would otherwise be the case. The material uncertainty clause is to serve as a precautionand does not invalidate the valuation.
Effect if actual results differ from assumptions
The value of all of the Universitys land and buildings subject to revaluation was 贈126.4 million prior to the2020 revaluation. The impact of a 5% change in valuation would be 贈6.3 million, either resulting in an increaseor a decrease in the Universitys revaluation reserve or an additional impairment charge.
