UNIVERSITY OF OXFORD: FINANCIAL STATEMENTS for the year ended 31 July 1993 SUPPLEMENT (1) TO NO. 4312 MONDAY, 17 JANUARY 1994 The report and financial statements published in this report represent the main elements of the University's Financial Statements for 1992--3, prepared in the format required by the Statement of Recommended Practice for the presentation of university accounts and audited by KPMG Peat Marwick. The full version, including detailed accounting policies, and additional supporting notes, is printed as a separate document, and is available to any member of Congregation on request. Report on the Financial Statements Scope and Format of the Financial Statements It has been the practice in previous years to relate the body of the financial statements to what were described as `activities falling in or closely associated with the normal pattern of teaching and research', and to include only a summary consolidated income and expenditure account and consolidated statement of financial position. These combined with the figures of the University as described above the figures for such bodies as the graduate societies which had not yet gained independence and the Delegacy of Local Examinations. Under the terms of Financial Reporting Standard 2, however, it has become necessary to reverse the emphasis. The main financial statements now cover the accounts of both the normal activities of the University and the accounts of its related bodies and subsidiary companies, other than the Oxford University Press, the accounts of which are not permitted under the Statutes and Decrees of the University to be included. The financial statements therefore need to be interpreted with some care by those seeking information about the normal activities of the University (although in accordance with the requirements of FRS 2 the Statement of Financial Position and its supporting notes are shown for the University only as well as in their consolidated form). The commentary on the financial position of the University however deals with the University in the narrow sense. Financial Position of the University The University began the year 1992--3 with a cumulative revenue- account deficit of 2.8m. Much of this deficit had arisen in 1991--2, when Council and the General Board agreed to provide targeted relief from some of the effects of the retrenchment programme which had just ended, as well as allocating extra funds for the long-term maintenance of buildings, so that the 1991--2 budget showed a deficit for that year of 2.2m. It was expected that growth in student numbers and changes in the HEFCE funding methodology (the latter being expected to favour the major research universities) would generate additional income in subsequent years, and both allow the long-term maintenance programme to continue and enable the University to rebuild its reserves. In the event, Council and the General Board decided, in their consideration of the budget for 1992--3, to defer starting to rebuild the reserves until 1993--4, and to continue to allocate to the various spending sectors of the University (in particular in the areas of academic spending and building maintenance) all the funds which the University was expected to receive in the year. They accordingly approved a budget which showed a surplus for the year of 0.2m, leading to a budgeted cumulative revenue-account deficit of 2.6m at 31 July 1993. In so doing, they deliberately decided to assume that the effect of the transfer of funds from the HEFCE to the Research Councils (the `DR-shift') would be financially neutral as far as central funds were concerned (although recognising that there might be an initial shortfall in departmental income). They also assumed that further changes in the HEFCE funding methodology would increase the University's income in subsequent years, and allow it to rebuild its revenue reserves. In the event, there were significant savings against the amount allowed in the university budget for salary awards (the Government having in effect imposed a 1.5 per cent ceiling), but these were offset by additional allocations for a variety of purposes, such as the Oxford Institute of Legal Practice, and the development of administrative computing arrangements, as well as by shortfalls on various income heads. These shortfalls fell into two main categories. On the one hand, declining interest rates and low investment returns were reflected in income from trust funds, etc., while on the other income from government sources fell short of budget either directly or indirectly as a result of changes in funding methodology, in such areas as support for the Interdisciplinary Research Centre, grant for local authority rates, and indirect cost contributions from Research Councils (under the DR-shift arrangements). The HEFCE clawed back nearly 0.1m on the teaching grant because Oxford's student numbers fell short of funding targets in certain areas, although overall recruitment was such that fee income comfortably exceeded the budget figure. The out-turn on normal activities was broadly in line with budget, and showed a deficit of under 0.1m, but it was thought prudent to provide 0.7m to cover that element of distributions from the University's deposit pool which related to unrealised profits on equities (this provision will be reversed as and when the profits are realised). It has also been necessary to increase by over 0.2m the amount set aside from central funds to cover departmental deficits, many of which have arisen as a result of the `DR-shift'. The actual out-turn for 1992--3 was accordingly a deficit of just under 1m, leaving a cumulative revenue-account deficit of nearly 3.8m. The outlook for 1993--4 and subsequent years continues to be uncertain. On the one hand, the element of the HEFCE grant which is related to research showed a significant real-terms increase in 1993--4, and would have been higher but for the application of a cap. (This cap was designed to smooth the release of additional funds to successful universities and by so doing to allow less successful universities to be given a temporary safety-net, without which their grant might have fallen too much in one year for them to be able to adjust their scale of activity in the time available.) On the other hand, the teaching element of the grant is subject to required efficiency-gains; and on the research side itself (where the total available for the whole university sector is distributed on a competitive basis) a university which is already achieving maximum ratings in the research assessment exercises cannot increase its score, but can only watch while other universities with lower scores improve their ratings and so erode its original share of the research funds. Some doubt has also been expressed as to when the research funds cap might be lifted, and there is still no confidence that the longer-term effect of the `DR-shift' will not be to reduce departmental income. Council and the General Board nonetheless believe that this university is in a sufficiently strong position for them to work on the assumption that overall income will continue to increase, and that they can still afford to delay rebuilding the reserves. They have therefore approved a budget for 1993--4 which continues to make increased allocations for academic and building maintenance purposes (although a large proportion of these allocations are on a non-recurrent basis, so that they can be discontinued if necessary in future years), and shows a surplus of 0.8m for the year, leaving a cumulative revenue-account deficit for 1993--4 of about 3m. It continues to be the intention to recover this deficit over the coming years, when it is hoped that the funding position will have stabilised. In the meantime, the deficit is more than covered by other reserves to which recourse could be had if necessary. In this context, it should be noted that although the consolidated statement of financial position shows the University's net worth as over 262m only a small proportion of the various funds is available for general purposes and in particular as a cushion which can allow the University time to adapt to unforeseen changes in its financial position. Over 66m represents the amount shown as capital to balance the written-down value of functional buildings, which has with effect from 1989--90 been required to be shown among the assets. Over 140m relates to specific endowments, the uses of which are restricted to the purposes defined in the relevant trust deeds, nearly 28m is held in general endowments and could only be spent (where the trust deed permits it) at the expense of future income, and over 30m is held either in restricted funds other than endowments (such as the Equipment Fund), or in reserves held by related bodies and subsidiary companies, or by departments and institutions, and has to a large extent already been committed for particular projects. In the absence of any significant free reserves, the University's policy is to cover deficits on the Income and Expenditure account by temporary borrowings from general endowments. Campaign for Oxford The Development Campaign was launched in October 1988 with a target of raising 220m in five years. This target was reviewed in 1991 in the light of changing needs within the University and of the campaign's achievements, and it was decided to continue the campaign for a sixth year and to raise its target to 340m. By the end of 1992--3, the total of amounts received, covenanted or pledged was nearly 280m. Of this, 118m is for the support of new or existing activities other than by research grants, of which the Campaign for Oxford Trust (an independent trust which receives all campaign donations other than research grants in the first instance, and from which payments are made to the University) had already received nearly 70m and had paid more than 50m to the University and 7m to various colleges, including in each case interest earned while the donations were with the trust. About 1m of the University's cumulative share was earmarked as contributions towards the running costs of the campaign. Over 22.5m has been provided for endowments, largely of new or existing posts but including over 4.5m for the Foundation Fund, a fund aimed at generating recurrent income for general purposes. Over 10.5m has been used for building projects, and over 2m has been allocated to Rewley House as the first stage of its endowment. The remaining 14m of the University's share was earmarked for particular purposes, mainly in such areas as the Bodleian Library and the Ashmolean Museum, but also providing over 3m for the short-term support of specific academic posts. Business Expansion Scheme The University has entered into a Business Expansion Scheme to raise capital for new student residential accommodation. By the end of 1992--3, the existing mortgages on student residential properties had been repaid and the University had entered into an agreement for the lease of student residential properties valued at 14,772K to the BES Companies. Leases on properties valued at 2,230K had been effected before 31 July 1993. The University had also purchased 150K of preference shares in the BES Companies before 31 July 1993. These have since been redeemed. Income and Expenditure account It continues to be necessary to sound the by now customary note of caution on the interpretation of the figure shown as the surplus for the year. Although that surplus has been calculated in accordance with the Statement of Recommended Practice, the operating structure and accounting organisation at Oxford are such that it includes elements which do not in general result from decisions taken at the centre, and are not directly under central control. Surpluses and deficits arising other than on the central General Fund (including those arising in related bodies and subsidiary companies) have accordingly been shown as transferred back to the appropriate funds, to leave a deficit after transfers which can be related to the figures used for the central management of the University. Total income rose by 7 per cent. Within this figure, the amounts received from the Funding Council and from Research Councils have been affected by the `DR-shift'. Funding Council grants were reduced in respect of the shift by 6,762K, and show a decline of 1.8 per cent (as against an increase of 8.7 per cent if there had been no shift). However although Research Council grants show an increase of 7,675K (32.8 per cent), it is estimated that only about 5,600K is attributable to the shift, on which basis the University has suffered a net loss of around 1m from a policy change designed to benefit the leading research institutions. Without the shift, it is estimated that the increase in income from Research Council grants would have been about 9 per cent, and the increase in total research grant and contract income would have been about 7 per cent, as against the 16 per cent shown in the accounts. Academic fees increased by 7.6 per cent. Endowments, Donations and Subventions showed an increase of 12.3 per cent. This increase is due to an increase in donations to departments and institutions from the Development Campaign and other sources. Other General Income declined by 4.1 per cent reflecting a reduction in general investment income as a result of lower interest rates and the provision to cover unrealised profits on equities held by the University's deposit pool. Income from other services rendered increased by 5 per cent. Expenditure as a whole rose by 7.5 per cent. Expenditure on Academic Departments increased by 7.1 per cent and Academic Services by 9.1 per cent. The cost of Academic Services now includes the new Educational Technology Resources Centre. General Educational Expenditure rose by 12.9 per cent mainly as a result of increased support for various categories of overseas students (refugees, scholars, etc). Expenditure on the maintenance of premises increased by 14.8 per cent. An extra 1.6m was spent on the long term maintenance of buildings and 0.7m on ordinary repairs and maintenance. Expenditure on pensions fell by 10.7 per cent as a result of a decrease in supplementation of pensions of past employees in the Federated Superannuation Scheme for Universities. Equipment and Furniture expenditure fell by 10.1 per cent. Departments reduced their expenditure from non-recurrent Equipment Fund allocations and in 1991--2 there had been an additional 0.6m spent from Furniture grants for new and adapted accommodation. Statements of Financial Position, Cash Flow Statement, and Statement of Total Recognised Gains and Losses The total book value of funds shown on the Consolidated Statement of Financial Position increased during the year by about 34.8m. The Statement of Total Recognised Gains and Losses analyses this increase into its constituent elements. (This is a new statement, introduced under the requirements of FRS 3, but adapted from the format envisaged by the FRS in order to accommodate the accounting principles set out in the Statement of Recommended Practice: Accounting in UK Universities.) 13.4m represents realisation gains (divided between specific endowments: 10m, general endowments: 1.5m, and outside bodies: 1.9m), and 11.3m was provided by new endowments (10.6m specific, and 0.7m general). External capital funding for buildings provided 5.3m, offset by a 1.5m appropriation to cover depreciation, and the balance was made up of income retained in endowments or restricted funds, of net receipts for outside bodies, and of the net increase in reserves. For the purposes of the Cash Flow Statement, investment income is required to be separated from operating activities, which show a cash outflow (after allowing for changes in relevant working capital figures) of 4.6m. There was nonetheless an increase in cash and cash equivalents of 25.9m. Returns on investments provided 11.6m, benefactions 11.3m and outside bodies 0.2m, in addition to which 13.5m of realisation gains were not reinvested in equities. The total inflow from these sources (36.7m) was applied to the funding of operating activities, to the purchase of land and buildings (net of contributions from external sources) and to the repayment of long-term liabilities. These outflows absorbed 10.8m, leaving a balance of 25.9m. The proportion of funds held as cash and equivalents or as investments varies significantly from year to year, investment policy being generally aimed at maximising total return rather than being tightly defined according to the source of the funds to be invested. In 1990--1 there was a 20m switch from short-term to long-term investments. In 1991--2 and in 1992--3, the proportion of money available for investment which was held as short-term deposits increased, partly in response to the level of interest rates obtainable and partly as a reflection of the increase in the level of funds held for the Development Campaign, which are normally invested on terms which allow them to be transferred to the University at short notice. Current changes in interest rates are likely to reverse this trend. Cash flow has been adversely affected by the transfer of funds from the funding council to the research councils. The net figure for research grant debtors less research grant advances remains just under 13 per cent of the increased research grant turnover, but over 5m of the increase in that turnover is now being paid in arrears rather than on a current-month basis. The restrictions applying to various funds have already been explained. Only a small proportion (of the order of 9 per cent) of the funds of 262m attributed to the University would be available to allow an orderly adjustment to any significant decline in income, and even this would involve eroding capital held to earn long term income.