Report on the Financial Statements (9.1.95) UNIVERSITY OF OXFORD: FINANCIAL STATEMENTS For the year ended 31 July 1994 Supplement (4) to No. 4348 Monday, 9 January 1995 Scope and Format of the Financial Statements The financial statements consolidate the accounts both of the normal teaching and research activities of the University and of its subsidiary companies and related bodies (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 care as a guide to the normal activities of the University (although in accordance with financial reporting standards 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 however deals with the University in the narrow sense. The format of the financial statements follows the requirements of relevant Financial Reporting Standards (FRS) and the current Statement of Recommended Practice: Accounting in UK Universities (SORP). Financial Position of the University The University's financial policy for 1993--4 was constrained by continuing uncertainty about the effects of the transfer of funds from the HEFCE to the Research Councils (the `DR-shift'). The grant from the HEFCE had been reduced by 6.8m in 1992--3 and was reduced by a further 3.8m in 1993--4; a third and final reduction of 1.5m has been made in 1994--5, leaving the University's grant from the HEFCE over 12m per annum lower than it would have been if the DR-shift had not taken place. The funds no longer received from the HEFCE are intended to be recovered by extending the range of costs to be charged directly to projects funded by Research Councils, and by collecting contributions from Research Councils towards indirect costs. The official expectation was that universities with a high level of research council income would benefit from the new arrangements. Council and the General Board, however, while choosing to assume for the purposes of preparing central budgets for 1992--3 and for 1993--4 that the DR-shift would be financially neutral, nonetheless recognised that it was unlikely that departments would succeed in recovering from Research Councils amounts equivalent to the HEFCE grant reductions, and retained a measure of flexibility for the future by allocating significant sums in the budgets for those two years only on a non-recurrent basis. The General Board indicated to departments that they would be allowed to incur temporary deficits while adapting to the new funding methodology. The central budget for 1993--4 showed a surplus for the year of 0.8m, which would have reduced the cumulative deficit on the Income and Expenditure account to 3m. In the event, there was a central surplus of 0.2m, against which, under the University's policy of making provision from central funds to cover departmental deficits, it has been necessary to set an increase of 2.4m in that provision. The increase in departmental deficits is in the main the result of departments finding it impossible to achieve the targets set for recovering additional direct costs from Research Councils. The Income and Expenditure account thus shows an overall deficit for the year of 2.2m, and a cumulative deficit of 6.0m. The effects of the DR-shift have been monitored since it began, and as explained above Council and the General Board have prepared central budgets in such a way that if there were a permanent reduction in net income it would be possible to adapt to it without cutting back on recurrent commitments. This has been made easier by the growth in the University's allocation from the HEFCE under the research heading, which, despite being capped as a transitional measure, has more than offset the reductions in the allocation under the teaching heading resulting from the HEFCE requirement for `efficiency gains'. The central budget for 1994--5 shows a surplus of 2.5m, in arriving at which Council and the General Board have agreed that the third tranche of HEFCE grant reductions under the DR-shift arrangements (being 1.5m) should for that year be borne by central funds and not added to the targets set for departments to recover from Research Councils. Were it not for the effects of the DR-shift, the short-term financial outlook would be buoyant. In the longer term, the outlook remains uncertain. It is hoped that the cap on the research element of the HEFCE grant will be lifted, but it has to be recognised that under HEFCE resource distribution arrangements it is probable that a university such as Oxford which is already achieving maximum ratings in the research assessment exercises will find its share of HEFCE research funding eroded as other universities with lower scores improve their ratings. At the same time the teaching element of the grant is expected to be further reduced in the search for efficiency gains. Against a background of possibly falling income, Council and the General Board will need to weigh up the competing claims of departments unable to achieve DR-shift targets, of the long-term building maintenance programme, of new academic developments, and of restoring the University's reserves. In this context it should be noted that, although the cumulative deficit on the Income and Expenditure account is more than covered by other reserves to which recourse could be had if necessary, only a small proportion of the various funds shown in the consolidated statement of financial position (totalling 292m) is available for general purposes and in particular as a cushion to allow the University time to adapt to changes in its financial position. Over 69m 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 162m relates to specific endowments, the uses of which are restricted to the purposes defined in the relevant trust deeds, 30m is held in general endowments and could only be spent (where the trust deed permits it) at the expense of future income, and nearly 36m is held either in restricted funds other than endowments (such as the Equipment Fund), or in reserves held either 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 the campaign in September 1994, the total of amounts received, covenanted or pledged was 340.4m. Of this, 139.5m is for the support of new or existing activities other than by research grants, of which some 110m had been received by 31 July 1994. Business Expansion Scheme In 1993 the University entered into a Business Expansion Scheme to raise capital for new student residential accommodation. Under the scheme the University has agreed to grant to the BES Companies leases on student residential properties valued at 14.8m, and to repurchase them in 1998 for 18.5m, representing the original purchase price and accrued interest payable. The University had received 14.7m by 31 July 1994, of which 13.3m has been invested on terms which will by 1998 yield the sum required for the repurchase. The 13.3m is included in long-term investments in the Statement of Financial Position. The amount received together with the interest accrued to 31 July 1994 ( 0.6m) is included as a long-term liability in that statement. The investment income and the interest payable have been included in the Income and Expenditure account. Income and Expenditure Account It should be noted that, although the surplus for the year 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 8.5 per cent. Within this figure there are two sets of compensating changes. First, fees from home students, which might have been expected to increase by nearly 1m as a result of inflation and a small growth in numbers, in fact fell by 3.2m. This was the result of government decisions to reduce the fee rates. This reduction was offset by a 3.8m fee compensation grant from the HEFCE, producing a net increase from these two items of only 0.6m (about 2 per cent) over the 1992--3 level of home fees. Fees from overseas students rose by nearly 1m (8.6 per cent), to produce a combined increase from fees and fee compensation grant of 4.0 per cent. Second, the HEFCE grant for research was reduced by 3.8m as the second stage in the DR-shift. This reduction (as explained above) was intended to be offset by a reduction in expenditure met from general income as more costs were charged directly to new Research Council grants. In practice it is not easy to identify such transfers. Expenditure on Academic Departments increased by only 2.3 per cent ( 1.6m) compared with an increase of 11.2 per cent ( 2.9m) in expenditure on Research Council grants, but the level of departmental deficits supports the view that the latter increase relates more to an increased level of activity than to costs being transferred. It is estimated that of the 11m by which the HEFCE grant for 1993--4 was reduced under the DR-shift the University recovered 5.7m as indirect cost contributions and something under 3m as transferred direct costs. In contrast to these shortfalls, the basic HEFCE grant for research (calculated by adding back to the net grant the DR-shift reductions) increased by nearly 10m (over 22 per cent). Nearly 3m of that increase was withheld under the HEFCE's policy of temporarily capping the grant to universities which were particularly successful in the Research Assessment exercise in order to phase in the reductions in grant to universities which performed less successfully, and the grant for research was further reduced as already explained for the second stage of the DR-shift. It nonetheless still showed a net increase of 2.8m (7.4 per cent). Within the remaining elements of the grant, funding earmarked for equipment and for long-term maintenance is not comparable from one year to the next. If these items and the fee compensation grant are excluded, the HEFCE grant shows a net increase of 2.0 per cent, being the research element increase of 7.4 per cent offset by a reduction of 10 per cent in funds for teaching, special factors and specific initiatives. Income from Research Grants and Contracts increased overall by 10.8m (14.6 per cent). Grants from Research Councils provided 3.9m of this increase, rising by 12.5 per cent, but an element of the rise results from the DR-shift. Grants from charities increased by 26.0 per cent ( 5.1m), while grants and contracts from other bodies rose by 7.7 per cent ( 1.8m). Other General Income increased by 3.2m (38 per cent), including a 1m increase in investment income of which 0.8m relates to the investment of Business Expansion Scheme proceeds. There was little or no change in income from Endowments, Donations and Subventions or in income from Other Services Rendered. Expenditure as a whole rose by 8.9 per cent. The 2.3 per cent increase in expenditure on Academic Departments has already been commented upon. The cost of Academic Services increased by 8.6 per cent. This reflects the escalating costs of library acquisitions, and increased purchases by the Ashmolean Museum. Expenditure on the maintenance of premises increased by 11.5 per cent including an extra 1.4m allocated to the long term maintenance provision. The costs of Administration and Central Services increased by 3.9 per cent. Equipment and Furniture expenditure increased by 21.2 per cent as a result of extra expenditure from the Equipment Fund of 2.2m by departments. Expenditure on the direct costs of Research Grants and Contracts increased by 9.7m (15.0 per cent). 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 31.3m. The Statement of Total Recognised Gains and Losses analyses this increase into its constituent elements. 14.3m represents realisation gains (of which 11.2m relates to specific endowments, 1.3m to general endowments, and 1.8m to outside bodies), and 10.5m was provided by new endowments ( 10.1m specific, and 0.4m general). External capital funding for buildings provided 2.4m, offset by a 1.7m appropriation to cover depreciation, and the balance was made up of income retained in endowments or restricted funds, of net changes in funds held for outside bodies, and of the net increase in reserves. The consolidated Statement of Financial Position at the start of 1993--4 included cash and cash equivalents of 53.4m. By the end of 1993--4, this had fallen to 25.6m. The Consolidated Cash Flow Statement analyses the 27.8m movement during the year, using the format required by FRS 1, the main effect of which is to include in Operating Activities movements in Restricted Funds as well as movements in the Income and Expenditure Account, but then to extract from Operating Activities movements relating to investment income and to realisation gains. The former appear as a separate item in the Cash Flow Statement, while the latter form part of the net movement on long-term investments. In broad terms, there was a total inflow of 47.3m, comprising net investment income of 12.2m, capital grants of 9.9m, receipts from BES companies of 14.7m, and benefactions of 10.5m. With the opening balance of 53.4m, this produced cash and cash equivalents of 100.7m. From this total, 6.4m was used to meet the cash shortfall on Operating Activities, 4.6m was spent on Land and Buildings, and a net 0.3m was paid to outside bodies. The total of these outflows was 11.3m, leaving potential cash and cash equivalents of 89.4m. Investment conditions during the year were such that it was appropriate to switch out of short-term funds (the proportion of investments held in which had increased in both 1991--2 and 1992--3), and 63.8m of the sum available was used to acquire long-term investments and short-term deposits not qualifying as cash equivalents, leaving 25.6m in cash and cash equivalents. As might be expected, the Cash Flow Statement has to be interpreted with care. The existence of substantial balances in the form of cash, cash equivalents, or other short-term deposits and long- term investments does not mean that there are funds available for spending. Such availability is determined by the nature of the fund holding the cash or investments. The restrictions applying to various funds have already been explained. Only a small proportion (of the order of 8.5 per cent) of the funds of 292m 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.