‘Tis the season to read university financial results

We are entering the season of financial results for the 2019-20 year, and it is likely we will see some unexpected and counter-intuitive figures.

Here are some pointers to look out for as you read the annual report and accounts of universities this winter.

The first national lockdown on 23 March impacted on the last third of the last financial year with many universities waiving rights to collect third student rents as well as implementing various budget mitigations to address the risk of the unexpected and unknown.

But don’t be surprised if a large number of research-intensive universities report super-sized surpluses for 2019-20. Why? Our old friend USS is the culprit, once again. The tip is to look at the comparative figures for 2018-19, usually shown to the right of the 2019-20 figures.

Watching the money

In that prior year, 2018-19, many in the USS end of the sector reported frighteningly large deficits; King’s College London posted a deficit for the year of a whopping £154m (17 per cent of its total income) and all but three in the Russell Group posted deficits. All thanks to an accounting charge (not an immediate cash call) as institutions recognised the 2017 USS deficit recovery plan for the first time.

While USS valuations have historically taken place every three years, we now seem to have fallen into a pattern of getting a new valuation every year. The 2017 USS valuation was based on a scheme deficit of £7.5 billion but in October 2019 this was replaced with the 2018 valuation, which reduced the scheme deficit to £3.6 billion.

So guess what this £3.9bn difference will make as universities account for this updated deficit recovery plan for the first time in 2019-20? With materially lower scheme liabilities to account for, many will report whopping credits to their surpluses for the year – reversing the large deficits they reported in the prior year.

Making sense of the shift

This topsy-turvy deficit-to-surplus shift doesn’t help anyone understand what is actually going on in university finances. To understand that you need to read university Annual Reports – which should explain underlying financial performance. As an example, this table demonstrates the distorting impact of pensions accounting at my own university for example:

So rather than flip from a £72m deficit to a £67m surplus last year, our underlying performance shows a reduction in the surplus from £15m to £1m – better reflecting the myriad impacts Covid-19 has had on our finances. Things like lost student rents, lost conference and catering income, impairment charges on paused capital projects which may not restart, partly offset with savings on travel, utilities and deferred repairs and maintenance, and some additional QR grant and furlough grant for closed commercial operations…

So, do you need to be an accountant to decipher University financial statements? It helps, but that’s unfortunate as it feeds conspiracy theories that suggest accountants have things to hide. However, it does emphasise the need for CFOs to clearly explain financial performance in internal communications and in the university’s external narrative reporting.

Does this matter?

Mainstream accounting is complicated enough but pensions accounting is doubly so. In the university world, this is partly because the sector has so many different types of schemes, each with their own accounting rules. But help is at hand – as BUFDG have recently published a brilliant free guide to accounting for pensions in higher education to complement the guide to Understanding University Finance.

Pay attention now – your university may have posted a large surplus, reflecting a reduction in the valuation of its USS pension liabilities, but it will still have a sizable pension liability to fund in the future. You can find this liability (called pension provisions) sitting on the balance sheet (or Statement of Financial Position as we must now call it, another change introduced in 2019-20).

Do university deficits caused by mere accounting actually matter? While the large swings and roundabouts for pension liabilities may not be cash today, they will be cash over the next 10 to 20 years. Ultimately liabilities have to be paid down over a period of time. They could also impact on loan covenants which may have consequences on some institutions. So, they do matter – because they are real. But the way changes to future liabilities are accounted for all in one go can distort the reported university surplus in any given year.

It saddens me that this topsy-turvy-ness is set to continue when universities report their results this time next year. As USS completes its third valuation in as many years, the 2020 version will result in a brand-new deficit recovery plan, due to be agreed by 30 June 2021 at the latest. Expect further big swings in headline reported surpluses and deficits this time next year. Oh dear.

I feel an apology is in order, on behalf of accounting standard setters, for making it so much harder to understand financial statements. Letters of complaint should be addressed to the UK’s Financial Reporting Council not to your chief financial officer!