QMU Strategic Report and Financial Statements 2022 - 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 2022, the University held gross cash of £15.2 million, excluding restricted funds held on behalf of SAAS (2021 gross cash of £15.3 million), while net current assets were £7.6 million. At 31 October 2022 the University held £14.8 million of gross cash.
The University’s external borrowings at 31 July 2022 totalled £21.2 million. Of this amount, £18.5 million related to a secured loan facility with Barclays Bank plc taken out to fund the campus development at Musselburgh, and £2.7 million related to an unsecured loan from the Scottish Funding Council under the Financial Transactions scheme. The University’s secured borrowings from Barclays Bank plc, as described above are subject to covenant terms. The University was fully compliant with those covenant terms during the year to 31 July 2022. A further £3 million of borrowings will be repayable during the going concern period to 31 July 2024.
Cash flow forecasts were prepared for the period up to 31 July 2024 to support management’s assessment of going concern. The institution’s base case scenario for the period forecast compliance with all loan covenants to 31 July 2024.
The greatest risk to the future financial sustainability of the University is that of further real terms (and possibly also cash-terms) reductions in the level of grant funding receivable from the Scottish Funding Council. This may be further exacerbated as a result of wider geopolitical and economic uncertainties. The University has built up a significant cash buffer which will allow it to navigate the difficult financial waters which lie ahead over the next few years, whilst it has at the same time managed to make a significant reduction in its level of borrowings.
Management has modelled a plausible downside scenario based on a number of adverse scenarios taking place in financial year 2023/24, including a cash-terms reduction in SFC grants, planned tuition fee growth not taking place, and inflation remaining much higher than forecast. In this scenario, the University retains liquidity headroom and compliance with covenants through the going concern period with both plausible and available mitigating actions being undertaken. These mitigations include, firstly, reducing uncommitted future spend on discretionary capital and maintenance programmes and, only if necessary, reducing staff numbers.
The University is continuing to monitor its forecast compliance with covenants. Management is confident that there are sufficient mitigating actions within the University’s control that would offset any reduced income to ensure compliance with future loan covenants, before the requirement for further renegotiation of covenants with its lender should plausible worst case scenarios occur.
After reviewing these forecasts, the University Court is of the opinion that, taking account of severe but plausible downsides, the Group and parent University will have sufficient funds to meet their liabilities as they fall due over the period to 31 July 2024.
Based on the assessment outlined above, the University has concluded that it has adequate resources to continue in operation for the period to 31 July 2024, 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 2022. 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.
The University and East Lothian Council each hold one share in Edinburgh Innovation Park Joint Venture Company Limited, with a nominal value of £1 per share. This is a joint venture between the parties, which was set up during the year with the purpose of constructing and managing the Edinburgh Innovation Park, which is to be developed on land adjacent to the University campus. As the University does not have overall control over the joint venture company, the results have not been consolidated into these financial statements.
(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.
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.
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 Scheme
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.
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 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) with related expenses being recognised through 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 STPS.
(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 at least 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 heritable properties comprising Queen Margaret University’s property estate were valued as at 31 July 2022 by an external valuer, Gerald Eve LLP, a regulated firm of Chartered Surveyors.
(H) Fixed assets (continued)
The valuation was prepared in accordance with the requirements of the RICS Valuation - Global Standards 2022 and the national standards and guidance set out in the UK National Supplement (November 2018), the International Valuation Standards, 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. The valuations of specialised properties were derived using the Depreciated Replacement Cost (DRC) method, whilst the student residences were valued as a trading entity using a Discounted Cash Flow (DCF).
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.
Investments in subsidiaries and joint ventures 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.
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.
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 at least 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.
In relation specifically to the Universities Superannuation Scheme, FRS 102 makes the distinction between a group plan and a multi-employer scheme. A group plan consists of a collection of entities under common control typically with a sponsoring employer. A multi-employer scheme is a scheme for entities not under common control and represents (typically) an industry-wide scheme such as the Universities Superannuation Scheme. The accounting for a multi-employer scheme where the employer has entered into an agreement with the scheme that determines how the employer will fund a deficit results in the recognition of a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deficit) and the resulting expense charged through the income and expenditure account in accordance with section 28 of FRS 102. The University Court members are satisfied that the Universities Superannuation Scheme meets the definition of a multi-employer scheme and the University has therefore recognised the discounted fair value of the contractual contributions under the recovery plan in existence at the date of approving these financial statements.
In relation to the Local Government Pension Scheme, in accordance with the accounting policy adopted by the University, where the calculation at the year-end date 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 scheme. The University assessed the recoverability of the asset on this basis and determined that it was appropriate that the surplus at 31 July 2022 was not recognised in line with the requirements of FRS 102.
Valuation of land and buildings
The heritable property comprising the University’s property estate was valued at 31 July 2022 by an external valuer, Gerald Eve LLP, a regulated firm of Chartered Surveyors. The valuation was prepared in accordance with the requirements of the RICS Valuation - Global Standards (January 2022 edition) and the national standards and guidance set out in the UK national supplement (November 2018), the International Valuation Standards, Financial Reporting Standard 102 and the 2019 Statement of Recommended Practice 'Accounting for Further and Higher Education'.
The part of the University campus comprising the student accommodation was valued as a trading entity using a discounted cash flow (DCF), on the assumption of a continuation of the existing use. This exercise resulted in a revaluation gain of £0.600 million, which has been reflected in the financial statements. The valuation took into account the requirement to undertake an ongoing programme of maintenance works on the ability to generate income from summer letting activities.
The valuation of the part of the University campus comprising the academic buildings was derived using the Depreciated Replacement Cost (DRC) method). This exercise resulted in a revaluation gain of £9.589 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 £10.189 million.
Effect if actual results differ from assumptions
The value of all of the University’s land and buildings subject to revaluation was £122.7 million prior to the 2022 revaluation. The impact of a 5% change in valuation would be £6.1 million, either resulting in an increase or a decrease in the University’s revaluation reserve or an additional impairment charge.