Guidance

Operating an academy trust as a going concern

Updated 24 April 2024

Applies to England

This content was last updated 27 October 2020.

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This guide is primarily aimed at academy trustees, but should also be read by:

• accounting officers
• chief financial officers
• clerks of academy trusts
• external auditors

1. What is meant by going concern?

UK financial reporting frameworks generally require the adoption of the ‘going concern basis of accounting’ in financial statements, except where an entity is to be liquidated or is to cease trading.

The International Standard on Auditing (UK), Going Concern, (ISA 570) defines the term ‘going concern’ assumption as:

the defining assumption about the condition of an entity for which adoption of the going concern basis of accounting is appropriate.

FRS102, The Financial Reporting Standard Applicable in the UK and Republic of Ireland, defines the period over which the going concern assumption must be considered as at least, but not limited to:

twelve months from the date when the financial statements are authorised for issue.

Simplistically, the term, ‘going concern’ is a view as to whether or not an entity will have sufficient funds to pay its obligations, such as payroll, trade creditors, and so on, as they fall due, over at least the next 12 months from the date of approval of the financial statements.

Even charitable companies with strong balance sheets and adequate reserves can find themselves in a vulnerable position if they have insufficient “liquid” (i.e. cash or near-cash) assets. A going concern issue therefore commonly manifests itself to charitable companies as a cashflow problem.

2. Accounting requirements and responsibilities

The going concern basis of accounting derives from company law and financial reporting standards. It is reinforced through the Financial Reporting Council's (FRC) Guidance on Going Concern which highlights principles for best practice to assist company directors with the practical application of the requirements set out in law, accounting standards or other regulations. The guidance states what should happen when a charitable company does not prepare accounts on a going concern basis or when there are material uncertainties casting significant doubt upon its ability to continue to adopt the going concern basis of accounting.

For academies, the Academies Accounts Direction (paragraph 6.2.7) requires academy trust financial statements to be prepared on a going concern basis, unless this is not the case. The Academies Financial Handbook (AFH) (paragraphs 1.14, 2.5 and 2.8) outlines trustee responsibilities around going concern.

Trustees are required to prepare an assessment to include in the accounts as to whether the academy trust is a going concern. The period of the assessment must be at least 12 months from the date of the signing of the financial statements. The factors which support the conclusion that the academy trust is a going concern should be disclosed, as well as clear disclosure of any uncertainties that make the going concern assumption doubtful (equally, where there are no material uncertainties, this should be stated).

A charitable company may be assumed to be a going concern in the absence of significant information to the contrary. Academy trusts have long-term funding agreements with the Secretary of State. Whilst this may be an indicator that, unlike many other charitable companies, their income is secure, this in itself is not a sufficient basis for accounts to be prepared on a going concern basis. A charitable company with secure income could still face questions as to its short-term viability if it is unable to address its short-term cash outgoings, which must be met as they fall due.

Whilst responsibility for going concern assessments to include in their accounts lays with trustees, they will be supported by advice from the trust's chief financial officer and senior leadership team. A trust's approach to the management of its going concern status will be a significant factor in ESFA's assessment of the trust.

By adopting the going concern basis of accounting, it means that trustees justify that there is no need to use alternative methods of accounting, as would be necessary if the charitable company were being liquidated or its operations were to cease.

The threshold for departing from the going concern basis of accounting is very high, but alternatives to liquidation or cessation of activities can be very challenging for an academy trust, with ESFA support not guaranteed.

Where ESFA support is provided, academy trusts could be issued with a Financial Notice to Improve (with reductions in the academy trust's level of delegated financial authority), or with a Qualifying Floating Charge to the Department for Education. Where an academy trust is assessed not to have a sustainable financial future, it is likely that ESFA will issue a Termination Warning Notice, with the respective schools being closed (if there is no basic need) or re-brokered to a financially viable academy trust - a complex and sustained process.

The ESFA's published guidance sets out the procedure for considering financial support for academy trusts when they are experiencing financial difficulty, including:

• the categories ESFA has for the use of financial support
• the circumstances in which ESFA may provide financial support and its repayment terms
• the criteria against which ESFA assesses academy trusts requesting financial support
• the conditions ESFA may make on academy trusts to ensure financial support is managed effectively

Whilst trustees may require information and contributions from academy trust finance staff to inform their assessment, it is ultimately the trustees who are responsible for making the assessment. The FRC guidance sets out some helpful principles for best practice, which trustees can draw on:

• The going concern assessment process should be proportionate to the size, complexity and the particular circumstances of the trust. The assessment should take into account the relevant facts and circumstances at the date of approval of the financial statements and should be documented in sufficient detail to explain the basis of the conclusion.

• In determining whether there are material uncertainties trustees should consider the magnitude of the potential impacts of the uncertain future events or changes in conditions on the academy and the likelihood of their occurrence, as well as the availability and effectiveness of any mitigating actions that could be taken.

• Trustees should consider threats to solvency and liquidity as part of their assessment of the principal risks and uncertainties faced by the academy trust.

Trustees should discharge their responsibility for assessing whether the academy trust is a going concern through working through/with the clerk, accounting officer, chief financial officer and finance team.Trustees should not remain passive and should satisfy themselves that the information to support the assessment is sound and challenge it where necessary. More detail on how they might do this is covered in section 6 below and Annex A.

3. Audit requirements and responsibilities

Once trustees have made their going concern assessment, the financial statements are prepared on that basis and must then be presented to the auditors, who are required to form a view as to whether trustees have been justified in preparing the financial statements on that basis.

Auditors' responsibilities in respect of going concern are set out in ISA 570. Auditors are to obtain sufficient appropriate audit evidence regarding, and conclude on:

• whether a material uncertainty related to going concern exists, and
• the appropriateness of management's use of the going concern basis of accounting in the preparation of the financial statements.

Trustees should not be taken unawares by being involved in difficult conversations with auditors regarding going concern during the audit process. Indeed, with effect from the 2020/21 financial year, trustees and academy trust finance staff may notice more detailed questioning around their going concern assessment from their auditors, who must comply with ISA 570. As part of this, auditors must demonstrate how they have challenged the academy trust's going concern assessment, the rigour with which they have tested this assessment and the evidence and supporting documentation obtained.

This may mean that controls and information used to make a going concern assessment at the academy trust will need to be improved, that academy trusts will need to provide greater granularity in their going concern assessments, and that academy trusts document their assessment of going concern more thoroughly than they do at the moment.

Auditors will evaluate an academy trust's ability to continue as a going concern for a period of at least 12 months from the date the financial statements are authorised for issue – therefore normally covering a period of up to 16 months from the balance sheet date. However, this is not an absolute cut-off and if there are known problems in the months immediately following the expiry of this 12 month period, the academy trustees would be expected to have made an appropriate disclosure to that effect. If there is an issue, the auditors are required to consider whether this needs to be reflected in their audit report.

If, even after discussions with the academy trust, auditors express doubt on the academy trust's ability to operate as a going concern and because of this qualify their opinion on the academy trust's accounts, then it would be considered a very serious matter and could lead to intervention by the ESFA.

4. Integrating short-term and longer-term financial planning and monitoring

The trustees' assessment regarding going concern in their accounts and the subsequent review by the auditors reflects a short-term view of solvency rather than a medium-term or longer-term view regarding financial sustainability. Of course, leaders in academy trusts need to be concerned about both, and trustees should not assume that all is well in the longer-term just because the accounts have been prepared on a going concern basis and the auditors agree.

In addition to the requirements around accounts preparation covered above, it is essential to good financial practice that trustees monitor whether or not the academy trust remains a going concern continuously. Further, trustees should actively review and challenge longer-term financial issues that may indicate future financial difficulties, possibly in 3 or 5 years' time, even if they are based on current funding patterns, known salary increases and predicted pupil numbers.

Longer-term issues require academy trusts to devise plans to address them. Such plans may include cost rationalisation, diversifying income streams, growing/declining pupil numbers, collaboration with other schools or academy trusts and making use of integrated curriculum and financial planning.

However, even the most finely calibrated long-term plan will be redundant if the academy trust finds itself in a position where, because of poor short-term planning (for example monthly payroll runs a few days before receipt of the monthly General Annual Grant (GAG) payment), there are insufficient liquid reserves on hand to meet the shortfall in required cash. As an academy trust cannot borrow or take out an overdraft it needs to have controls in place to ensure that there is appropriate timing and control of incomings and outgoings and overall cashflow including management of capital projects.

5. The importance of reserves

The AFH, paragraph 2.10, reminds trustees that they must approve a balanced budget, taking into account brought forward reserves. Academy trusts are expected to maintain reserves, as they are standalone charitable companies. The AFH also states that the board of trustees must notify ESFA within 14 days if proposing a deficit revenue budget for the current financial year which it cannot address after considering unspent funds from previous years.

The amount of reserves each academy trust should set aside will depend on the type and size of the academy trust as well as the particular risks that it faces (for instance, if they are locked into a PFI contract). Trustees also need to consider how "liquid" their revenue reserves should be. This is in addition to any reserves which trustees wish to set aside for any capital projects.

A sound reserves policy is therefore essential for all academy trusts. The Charities Commission has produced guidance which includes how to develop a reserves policy and what trustees should do to keep proper oversight of their organisation's reserves. Any deviation from an academy trust's reserves policy should be minuted by the trustees and detail what plans are being considered to ensure the academy trust maintains reserves in accordance with their policy.

6. Know your financial situation to support your going concern assessment

To predict possible financial and cashflow difficulties trustees should know the academy trust's position based on the best and most up to date information possible. As stated above, trustees and executive leaders cannot simply rely on the going concern opinion "because the external auditors have said it's ok". It is for the academy trust to assess whether it is a going concern - the external auditors' opinion is provided based on the review of the assessment, taking into account other information obtained during the course of the audit and in the absence of significant information to the contrary (it will not necessarily take into consideration longer-term financial health).

As with all leaders, trustees need to "understand the numbers". This is more than simply being able to interpret a budget statement or a balance sheet or to understand the percentages in a spreadsheet. They need to be able to ask the right questions to appropriately challenge the financial and related information provided by their chief financial officer (CFO) and then test and challenge it for accuracy and reliability.

A key source of information which trustees must probe is the management accounts. The AFH states that management accounts must include an income and expenditure account, variation to budget report, cash flow statement and balance sheet, that the management accounts must be shared with the chair of trustees every month and with the other trustees six times a year, and that the board of trustees must consider them when it meets.

A fundamental area for trustees to interrogate each term is the interaction between the pupil numbers an academy trust is currently funded for, as per its General Annual Grant ('GAG'), compared against the actual numbers on roll. Differences between funded and actual pupil numbers could result in additional funding being due, or funding being automatically clawed back by ESFA, potentially undermining a going concern assessment. Monitoring pupil numbers and related funding will enhance the ability of trustees to assess whether staffing levels are proportionate to the cohort size and needs and affordable.

Trustees might also benefit from a summary to the management accounts, including, for example the use of charts and graphs. The volume and depth of the summary should depend on the size, complexity and current financial position of the academy trust.

Another key source of information are financial forecasts, which are an important tool for medium and longer-term financial planning. They should always be over at least a 3-year period (preferably 5 years). Financial projections would also usually project various scenarios and be based on the academy development plan, best known funding criteria, predicted pupil numbers (compared with actual pupil numbers, termly or as at the census points) and staffing profile. However, longer-term financial forecasting does not displace the need for detailed in-year analysis of cashflows and all other matters that could lead to adverse budget variances and diminishing liquidity.

The obligation to challenge requires trustees to challenge themselves as well as finance staff. Does the board consider that they have the right balance of skills and knowledge? Are trustees receiving the right information? Do they limit their consideration of the longer-term challenges facing the academy trust solely to the annual budget setting cycle?

Trustees also need to pitch their challenge in a way that achieves an appropriate balance between the shorter-term issues that might influence the going concern basis of accounting and the longer-term ones that assess financial sustainability. A non-prescriptive menu of potential challenge issues is provided at Annex A.

7. Conclusion

Future planning and accurate future financial projections have never been more important and accounting officers. Finance staff and leaders in academy trusts face a number of challenges regarding shorter-term financial management and control.

The board of trustees is responsible for ensuring that there is an assessment to support the preparation of an academy trust's financial statements on a going concern basis. They cannot rely on the external auditors' opinion.

Not performing appropriate assessments, monitoring management accounts or not planning ahead runs the risk of missing critical opportunities to avoid both deficits and negative cashflow. It should be recognised that, should such a step become necessary, it may take up to 12 months to plan and execute a staffing restructure. The more informed trustees are the better equipped they will be to address any financial concerns.

The best step for any academy trust facing a deficit budget or reduced liquidity is early intervention. Sometimes difficult decisions must be made which have longer-term implications, for example, restructures and the postponement of capital plans.

However, regardless of the financial predicament of the academy trust, to ensure that it remains a going concern requires detailed and relentless focus on shorter-term issues and especially trustees asking the right questions of the right people at the right time.

8. Annex A Financial challenge issues for academy trustees

Short-term finances (going concern)	Long-term finances (financial sustainability)
Is the current year budget in deficit and, if so, how satisfied are you that steps are in place to recover the situation before reserves are exhausted?	What skills does the board have in relation to strategic financial management? What training is undertaken? How does the board ensure it remains up to date on financial issues?
Have we forgotten anything that would increase our outgoings, e.g. rises in TPS employer contribution rates, a rise in NI, the Apprenticeship Levy, etc.?	Do academy trustees understand the financial information they are looking at and how it has been derived? Is there consistency in reports to allow appropriate analysis for trends?
Does the budget for the current year break down into a monthly analysis of all incomings and outgoings?	What benchmarking has the academy trust performed both internally, year-on-year and with other similar academies? How do the academy trust's outcomes – like value added – compare to other similar schools and academies relative to spend on staffing? What are the total staffing costs compared with total income? (80% and above of total income is usually considered high and possibly unsustainable long-term.)
Do you understand the academy trust's scheme of delegation? Who has authority to spend? What measures are in place to control and monitor spend?	How strong is the challenge within the academy trust?
Has the budget considered pay progression (including accelerated progression) as well as any across the board salary increases?	Are the budgets produced broadly accurate over time and when significant variances arise, what actions were taken and were these effective?
Does the board receive cash flow forecasts throughout the financial year showing actual cash surplus against predicted surplus?	Are resources allocated in line with the academy trust's strategic priorities?
Does the academy trust ensure that the CFO prepares a monthly list and analysis of account balances, money owed and money owing etc, as well as income and expenditure?	When were the pupil forecast numbers used in the three or five-year budget forecast last reviewed/checked? How accurate were previous pupil forecasts?
Does the academy trust have a process in place for the ongoing review of all contracts to ensure that they continue to offer best value for money? Have any annual contracts or service level agreements been reviewed ahead of their renewal date?	Does the academy trust have a clear budget forecast, ideally for the next 3 or 5 years, identifying spending priorities and risks and which sets how these will be mitigated?
Does the academy trust receive bank statements regularly and always ensure that there are sufficient funds on hand in advance of major outgoings, e.g. payroll?	Do the reserves comply with the reserves policy? Are there sufficient reserves to cover major changes like restructuring, and any risks to reserves identified in the budget forecasts?
Does the academy trust have sufficient liquid reserves on hand to ensure that it could meet most unexpected obligations?	Has the academy trust updated its risk register to reflect any identified funding issues?
Would the academy trust be able to meet the costs of catastrophic events through either reserves, RPA or insurance? How long would it take the insurer to pay out and what would happen in the meantime? Is this noted in the Risk Register?	What is the three-year trend regarding our reserves? Are they rising or falling?
How do our current pupil numbers on roll compare to our funded numbers? Do we have sufficient reserves to account for any potential clawback?	How can better value for money be achieved?
-	Is the academy trust making best use of its budget, including in relation to planning and delivery of the curriculum? Is the teaching contact ratio "efficient" and how does it compare to that of other comparable academy trusts?
-	Does the academy plan its budgets on a "bottom up" (sometimes referred to as "zero-based") basis based on curriculum planning (i.e. the academy trust spending is in accordance with its current priorities) or is the budget set by simply making minor adjustments to last year's budget?
-	Are the academy trust's assets and financial resources being used efficiently? What evidence do you have to support this opinion?