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 material in 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 Reporting Standard (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 of FRS 102. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings.
The functional currency of the University is pounds sterling, and the financial statements have been prepared to round £000s.
The financial statements have been prepared on a going concern basis. The University and Group’s activities, financial performance and financial position, together with factors likely to affect its future development and performance, are described in the Strategic Report. Emerging and principal risks and uncertainties facing the University are described on page 5. At 31 July 2020, the University held gross cash of £8.8 million (2019 gross cash of £8.1 million), while net current assets were £4.0 million. At 31 January 2021 the University held £13.5 million of gross cash.
The only external borrowings of the University at 31 July 2020 were debt with a balance of £29.1 million, comprising covenanted debt with Barclays Bank plc. Between 1 August and 31 January 2021, £0.7 million had been repaid in accordance with loan agreements. A further £1.5 million of borrowings will be repayable during the going concern period, which runs for a 12-month period from the date of approval of these financial statements to February 2022.
In light of the unprecedented nature of the COVID-19 pandemic and its potential impacts on funding and key income streams, there has been significantly increased focus on the area of going concern. The going concern assessment included consideration of:
- the current and developing environment in which the University and Group operates;
- the University’s 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 disruption resulting from COVID-19 and the related impacts on tuition fees, other income, increases in COVID-19 related expenditure and bad debt, and before any mitigating actions are taken by management. In this scenario, the University and Group is still forecasting material liquidity throughout the going concern assessment period to February 2022, with minimum liquidity headroom throughout the period of £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 £5 million, the minimum level of cash required to ensure compliance with bank covenants, in March 2022, one month after the going concern period. Should the University’s financial position through the going concern period deteriorate in line with the downside scenario outlined or worse, management will make use of the following mitigations to address this in advance of it running out of cash
1. Further reducing maintenance costs to the value of £0.5 million.
2. A reduction in staff costs through a recruitment freeze to the value of £0.1 million.
3. A reduction in cleaning, maintenance and utilities costs for the accommodation block to the value of £0.2 million (to reflect reduced occupancy of the student accommodation during semester and during the summer period).
4. Removing temporary accommodation staff costs to the value of £0.1 million (to reflect the loss of income from summer accommodation letting business).
The University borrowings listed above are subject to covenant terms. The University was fully compliant with those covenant terms during the year to 31 July 2020. In response to the significant uncertainties arising as a result of the COVID-19 pandemic, the University entered discussions with its lender regarding amendment of covenant terms, and reached agreement on revised covenants on 27 January 2021 for the covenants being measured at 31 July 2021, the only measurement point in the going concern assessment period. The Operational Leverage Covenant has been revised, which is the ratio of borrowing at the end of each relevant period to adjusted operating surplus or deficit. Based on the plausible worst case scenario outlined above, the University forecasts headroom against the most stringent covenant of £0.5 million at 31 July 2021. It also forecasts 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 key measurement date after the going concern period at 31 July 2022, including under the plausible worst case scenario. Should this scenario be realised, in particular in respect of significantly reduced student recruitment and residences occupancy in the 2021/22 academic year, management is confident that there are sufficient mitigating actions within the University’s control that would offset this reduced income to ensure compliance with 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 to continue in operation for at least 12 months from the approval of these financial statements and for this reason the 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 financial year ended 31 July 2020. Details of QMU Enterprises are given in note 13. Intra-group transactions are eliminated on consolidation. Amounts in relation to debts and claims between undertakings included in the consolidation are also eliminated.
The consolidated financial statements do not include the results of the Queen Margaret University Students’ Union on the grounds that it is a separate legal entity in which the University has no financial interest and exerts 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 the Consolidated Statement of Comprehensive Income & Expenditure over the period during which students are studying. Where the amount of the tuition fee is reduced by a discount for prompt payment, income receivable is shown net of the discount. Bursaries and scholarships are accounted for gross as expenditure and are not deducted from income.
Income from the sale of goods and services is credited to income in the year in which the goods or services are 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 and subsequent 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 are receivable. Non-recurrent grants and donations are recognised when they are receivable and when performance conditions have been met. Income received in advance of performance conditions being met is included in creditors as deferred income. Where there are no performance conditions, income is recognised when it is receivable.
Donations and endowments
Donations and endowments with donor-imposed restrictions are recognised as income when the University is entitled to the funds. Income is retained within the restricted reserve until such time as it is utilised in line with such 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 capital grants are recognised as income when the University is entitled to the funds subject to any performance related conditions 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 the Universities 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 a separate trustee-administered fund to meet long-term pension liabilities to past and present employees. The University 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 earned in return for their service in current and prior periods, discounted to determine its present value, less the fair value (at bid price) of plan assets. The fund is valued every three years by professionally qualified independent actuaries using the projected unit credit method. Where the calculation results in a net asset, recognition of the asset is limited to the extent to which the University is able to recover its share of the surplus, either through reduced contributions in the future or through refunds from the plan. In calculating the amount of the provision at 31 July 2020, the assumptions used in calculating the McCloud element of the liability have been refined based on the most recent data available. This has led to an increase in the liability and the expense of £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 from employers and from those current employees who are members of the scheme and who pay contributions at progressively higher marginal rates based on pensionable pay, as specified in the regulations. The rate of employer contributions is set with reference to a funding valuation undertaken by the scheme actuary. The University is unable to identify its share of the underlying assets and liabilities of the scheme. Accordingly, the University has accounted for its contributions as if it were a defined contribution scheme. The University has no 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 all members), as well as defined contribution benefits. The assets of the scheme are held in a separate trustee administered fund. Because of the mutual nature of the scheme, the assets are not attributed to individual institutions and a scheme-wide contribution rate is set. The University is therefore exposed to actuarial risks associated with other institutions’ employees and is unable to identify its share of the underlying assets and liabilities 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 defined contribution scheme. As a result, the amount charged to the income and expenditure account represents the contributions payable to the scheme in respect of the accounting period. Since the University has entered into an agreement (the Recovery Plan) that determines how each employer within the scheme will fund the overall deficit, the University recognises a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deficit) and therefore an expense is recognised in the income and expenditure account.
Enhanced pension benefits
In a number of instances, the University has agreed to provide enhanced pension benefits in respect of members of staff taking early retirement. These additional benefits are unfunded and are charged, as and when they arise, against a provision established when members retire to meet this liability. This provision relates to former members of staff who are members of the STSS and a small number of staff in receipt of exgratia pension payments from the University.
(E) Employment benefits
Short-term employment benefits such as salaries and compensated absences are recognised as an expense in the year in which the employee renders service to the University. Any unused benefits are accrued and measured 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 an asset are treated as if the asset had been purchased outright. The assets are included in fixed assets and the capital elements of the leasing commitments are shown as obligations under finance leases. The lease rentals are treated as consisting of capital and interest elements. The capital element is applied in order to reduce outstanding obligations and the interest element is charged to the income and expenditure account in proportion to the reducing capital element outstanding. Assets held under finance leases are depreciated over the 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 the end of the financial year, with all resulting exchange differences being taken to the income and expenditure account in the year in which they arise.
(H) Fixed assets
Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Certain items of fixed assets which had been revalued to fair value on or prior to the date of transition to SORP 2015 are held on a basis of fair value cost, being the revalued amount at the date of that valuation. Where parts of a 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 the University Court reviews the value of the assets. Where the value of the Land and Buildings is considered to be below cost, either by external valuation or as a result of the Court’s review, and this is considered to be a permanent diminution in value, the difference is charged to the income & expenditure account as an impairment charge. The part of the University campus comprising the academic buildings was revalued at 31 July 2020 by Gerald Eve, Chartered Surveyors. The basis of the valuation, which was carried out in accordance with guidelines issued by the Royal Institution of Chartered Surveyors, is depreciated replacement cost.
The heritable properties comprising the Queen Margaret University Student Village were valued as at 31 July 2020 by, Gerald Eve LLP, a regulated firm of Chartered Surveyors. The valuation was prepared in accordance with the requirements of the RICS Valuation - Global Standards (July 2017 edition) and Financial Reporting Standard 102 and the 2019 Statement of Recommended Practice 'Accounting for Further and Higher Education'. The valuation was undertaken on a Fair Value basis, equated to Market Value on the assumption of a continuation of the existing use.
Costs incurred in relation to a tangible fixed asset after its initial purchase or production are capitalised to the extent that they increase the expected future benefits to the University from the existing tangible fixed asset beyond 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 their expected useful lives of between 10 and 50 years. No depreciation is charged on assets in the course of construction.
Equipment, including computer equipment and software, costing less than £10,000 per individual item or group of related items is written off in the year of acquisition. All other equipment is capitalised and depreciated on a straight line basis over periods ranging from three to five years, being its expected useful life. A full year’s depreciation 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 any movements 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 on demand if they are in practice available within 24 hours without penalty. No investments, however liquid, are included as cash. Liquid resources comprise assets held as a readily disposable store of value. They include term deposits, government securities and loan stock held as part of the University’s treasury management activities.
(K) Provisions, contingent liabilities and contingent assets
Provisions are recognised when the University has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is discounted to present value where the time value of money is material. The discount rate used reflects current market 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, the existence of which will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within the control of the University. A contingent liability may also arise in circumstances where a provision would otherwise be made but either it is not probable that an outflow of resources will be required or where the 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, the existence of which will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within the control of the University. Contingent assets and liabilities are not recognised in the Balance Sheet but 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) Act 2005, and as such is a charity within the meaning of section 506(1) of the Income and Corporation Taxes Act 1988. The University is recognised as a charity by HM Revenue & Customs and is recorded on the index of charities 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 from taxation in respect of income and capital gains received within categories covered by sections 478 to 488 of the Corporation Tax Act 2010 or section 256 of the Taxation of Chargeable Gains Act 1992, to the extent that such income or gains are applied exclusively for charitable purposes.
The University receives no similar exemption in respect of Value Added Tax (VAT). Irrecoverable VAT arising from expenditure on non-trading activities is charged to the income and expenditure account. Any irrecoverable VAT allocated to fixed assets is included in their cost.
(M) Reserves
Reserves are classified as either restricted or unrestricted. Restricted endowment reserves include balances which, through endowment to the University, are held as a permanently restricted fund which the University must hold in perpetuity. Other restricted reserves include balances where the donor has designated a specific purpose 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 and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the year. It is the view of the directors that there are no significant 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 actuarial valuations. 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 underlying assumptions and the long term nature of these plans, such estimates are subject to significant uncertainty. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in the respective currency with at least AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having excessive credit spreads are removed from the population bonds on which the discount rate is based, on the basis that they do not represent high quality bonds. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation 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 by Gerald Eve, Chartered Surveyors. The valuation was prepared in accordance with the requirements of the RICS Valuation - Global Standards (July 2017 edition) and Financial Reporting Standard 102 and the 2019 Statement of Recommended Practice 'Accounting for Further and Higher Education'. The valuation was undertaken on a Fair Value basis, equated to Market Value on the assumption of a continuation of the existing use. This exercise resulted in a revaluation loss of £4.314 million, which has been reflected in the financial statements. The valuation took into account the impact of the COVID-19 pandemic on the short-term reduction in 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 Gerald Eve, Chartered Surveyors. The basis of the valuation, which was carried out in accordance with guidelines issued by the Royal Institution of Chartered Surveyors, is depreciated replacement cost. This exercise resulted in a revaluation gain of £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 £5.172 million.
Consideration has been given to the effects of the COVID-19 pandemic on the University’s property assets and their associated values. The COVID-19 outbreak is a global pandemic that has affected all parts of the global community. It is a fast-changing, fluid situation, with government recommendations and requirements being reviewed and updated on an ongoing basis. Many business sectors have been forced to close as part of government restrictions to reduce the spread of the virus, and the full effects of the virus on property markets and the wider economy are yet to be fully understood, assessed or quantified. Currently, there is insufficient empirical data available to make an informed and evidence-based decision on whether or not there has been a significant impact on asset valuations. Occupancy levels, rental figures, land values and BCIS costs and indices will all require to be monitored and reviewed going forward to assess the full impact of the COVID-19 outbreak on asset valuations. In light of the foregoing, it is considered appropriate to include the following RCIS-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 “Global Pandemic” on the 11th March 2020, has impacted global financial markets. Travel restrictions have been implemented 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 market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement. Gerald Eve have therefore indicated that their valuations, upon which management has relied, are reported as being subject to ‘material valuation uncertainty’ as set out in VPS 3 and VPGA 10 of the RICS Valuation – Global Standards. Consequently, less certainty – and a higher degree of caution – should be attached to the valuations than would normally be the case. Given the unknown future impact that COVID-19 might have on the 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 not mean that the valuation cannot be relied upon. Rather, the declaration has been included to ensure transparency of the fact that – in the current extraordinary circumstances – less certainty can be attached to the valuation than would otherwise be the case. The material uncertainty clause is to serve as a precaution and does not invalidate the valuation.
Effect if actual results differ from assumptions
The value of all of the University’s land and buildings subject to revaluation was £126.4 million prior to the 2020 revaluation. The impact of a 5% change in valuation would be £6.3 million, either resulting in an increase or a decrease in the University’s revaluation reserve or an additional impairment charge.
