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Are total funds a good indicator of the ability to continue as a going concern?

07/07/2022

Simple answer… no!

Firstly, we must consider what is a ‘going concern’?

This concept is the consideration as to whether the academy trust can continue its operation for at least 12 months from the signing of the financial statements. Fundamentally, can the trust pay its debts as they fall due?

Our previous article looked at why bank balances don’t equal funds. We need to break that down even further when considering going concern as the only relevant part of those funds is free reserves.

Total funds will include restricted funds which have to be used for specific purposes and are therefore ring-fenced and cannot be used as part of a going concern assessment.

Free reserves are:

  • The amount of unrestricted funds that are readily available for 'any use'.
  • Readily available means that you don’t need to sell charitable property to spend the unrestricted funds.

Taking this reserve figure gives an indication at a single point in time of the funds that an academy has available to support its operations.

However, this is only a snapshot and does not take into account any other known information which in turn may impact going concern.

It is the responsibility of the trustees to decide whether the trust is a going concern and they cannot do that with a review of free reserves alone.

Considerations must include:

  • Cash flow
  • Free reserves
  • Capital commitments/requirements
  • Teaching staff (e.g. pay scales/retirements)
  • Future plans (transfers in/out of a trust)
  • Ofsted results.

The depth of the information provided to the trustees will vary greatly depending on the size and structure of the academy trust; but, it is the responsibility of the trustees to agree with the accounting officer the level of information which would be sufficient to assess the situation. The trustees must ask the right questions in order to fully form their opinion.

The auditors of a trust will then audit the trustees’ assessment and have a responsibility to challenge any assumptions that have been made.

If trustees require training and/or advance as to how to assess going concern please contact our Education Team .

This article is from the latest edition of our Education Bulletin. To receive future copies of any of our newsletters directly to your inbox, please visit our preference centre to register your interest.

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Author
People Director | Basildon

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