Earlier this month the Education and Skills Funding Agency (ESFA) issued a new practice guide for academy trust reserves. See the link here.
As part of the external audit the auditors examine the trust’s reserve policy to make sure that the reserves held by the trust are in line with the policy approved by the trustees, and that the appropriate disclosures are made in the financial statements.
During the audit, we have many conversations with business managers and trustees on this topic and the ESFA practice guide is a useful resource to support those discussions.
The decision on the level of reserves is the responsibility of the trustees. They need to identify and understand the underlying financial risks that apply to their trust and assess the level of reserves that would mitigate those risks.
In quantifying the reserves policy, the trustees should consider a variety of factors, including:
- planning for unforeseen costs, such as supply staff to cover absences or emergency repairs,
- short term deficits in the budget where the money must be spent before the grant is received,
- saving towards planned future expenditure on the trust’s estate, and
- investing in school improvement or expansion of the central support services for schools within a multi academy trust.
The reserves policy is an important link between the trust’s strategic planning and budgetary processes.
Trustees have the freedom from the ESFA to set the reserves policy that is most appropriate for their trust and there is no set formula which will fit all circumstances. It may be a fixed amount, an upper and lower range, a % of annual income or set at a figure that equates to a pre-determined number of months’ expenditure.
Whatever methodology is applied, it is important to consider the consequences of holding too little in reserve and holding excessive reserves.
The ESFA has said that they contact those trusts that hold less than 5% of total income in reserve because that is the point at which the trust may become financially vulnerable and less able to cope in the short-term with changes in circumstances, for example an unexpected fall in pupil numbers, a drop in pupil outcomes or the absence of key members of staff.
The ESFA practice guide explains that reserves that equate to more than 20% of total income are considered to be set at a high level. This can be a valid strategy if the trust has plans in place for capital investment to improve pupil outcomes for which those funds are needed. However, without such plans, excessive reserves are harder to justify given that the government funding is intended for the benefit of pupils.
In conclusion, it is essential that trustees establish a reserves policy which is right for their circumstances and monitor the policy to ensure it remains appropriate as the trust evolves. If the trust is failing to comply with the policy or the headroom is diminishing over time, it could be an indicator that the trust is running into financial difficulties or, for example, not recognising the impact of inflation on its cost base.
The next step
If you would like help on the requirements for your reserves policy or would like to discuss your individual circumstances, please contact Liz Searby on firstname.lastname@example.org, or your usual UHY adviser.