University of Oxford - Finance Division Accruals Policy 2009

University of Oxford Finance Division

FINANCE POLICY DOCUMENT

ACCRUALS POLICY

2009 University of Oxford - Finance Division Accruals policy 2009

Version: v0.4 Status: Draft

Author: Ben Heath Document Owner: Ben Heath Intended Audience: Departmental Administrators and Departmental Finance Staff, Divisional Accountants Finance Managers, Heads of Finance, and process owners.

Document History.

Document Location The latest version of this document is available from the owner. Revision History

Date of this revision: n/a Revision date Version Summary of Changes Number 18 January 2007 v0.2 Changes from Dept project team and Divisional Accountants 12 February 2007 v0.3 Changes from User Group and various other reviewers 30 March 2009 v 0.4 Updates following Financial Reporting review

APPROVALS This document requires the following approvals. Name Signature Job Title Date of Issue Giles Kerr Finance Director

Rob Williams Group Financial Controller

Accruals Policy v0.4

TABLE OF CONTENTS

1) BACKGROUND...... 4 2) WHAT IS ACCRUALS ACCOUNTING?...... 4 3) JUSTIFICATION FOR ACCRUALS ACCOUNTING...... 5 4) CHANGE...... 6 5) APPROACH...... 6 6) MATERIALITY...... 7 7) TIMING...... 7 8) SCOPE...... 7 9) ACCOUNTING ITEMS EXCLUDED FROM ACCRUALS ACCOUNTING...... 8 10) FUTURE POSSIBLE DEVELOPMENTS...... 8 11) BALANCE SHEETS FOR DEPARTMENTS AND REPORTING...... 9 12) DISPUTES PROCESS...... 9 13) SUPPORT AND COMMUNICATION...... 9 14) YEAR END PROCESS...... 9 APPENDIX 1- ACCRUALS ACCOUNTING – TECHNICAL BACKGROUND...... 10 APPENDIX 2 HOW TO POST AN ACCRUAL...... 11 APPENDIX 3 GOODS RECEIVED NOTE (GRN) ACCRUALS...... 14 APPENDIX 4 HOW TO POST AN ACCRUAL IN ORACLE...... 16

1) BACKGROUND

The University of Oxford up to 2007 only calculated accruals at the year end in preparing its Financial Statements. During the year, accounting transactions were accounted for on a “cash basis”. With the need to improve management information to PRAC, Divisions, Departments, and Finance Division, there is a need for more accurate information.

For instance, at the first quarterly review of results in 2006-7, the University results showed a surplus of £13m compared to a full year expected budget deficit of £8m. The results were however not on a comparable basis as there were major mismatches with income received in the first quarter accounts whilst the related costs were not received. This made understanding of the financial performance of the University and many Divisions very difficult.

Many Departments are also frustrated having invested a lot of time in preparing detailed budgets for 2008/9 but find that analysis of actual v budget variances are distorted when a cost has been incurred but there is no accounting entry until the invoice is received and entered. This may mean that their analysis of budget v actual variances shows major variances, which are just down to timing differences. Accruals accounting can help to remove some of these differences improving the accuracy of the accounts and allowing more meaningful management decisions to be made.

Accruals accounting is now carried out on major items on a quarterly basis Divisionally and it is intended to expand the scope over time.

The introduction of Accruals accounting was also recommended practice from HEFCE.

2 ) WHAT IS ACCRUALS ACCOUNTING?

A detailed technical explanation of Accruals accounting is shown in Appendix 1 but a simple definition would be:

“Revenues and costs should be included in the month in which they are incurred and not the month in which the cash is received or paid”.

This could be applied to a number of accounting areas in the University:

 Income accrual. A service has been provided at the end of a month e.g. a conference has been hosted by a department for an outside company. The income should be included in the period in which the income is earned not in the month the sales invoice is raised which may be in a subsequent month.

 Cost accrual. A cost has been incurred during a month e.g. a piece of equipment has been repaired. It maybe that the invoice has not yet been received and the goods or services have also not been receipted in the month. This would result in the cost not be included in the correct month/year.

Also included in cost accruals are centrally posted accruals for amounts received and matched to purchase orders but for which invoices have not been received. These are called

4 University of Oxford - Finance Division Accruals policy 2009 Goods Received Note (GRN) accruals and will be posted by the Financial Reporting team and not by Departments. (explained in more detail in Appendix 3).

 Prepayment. A payment is made in advance e.g. a payment has been made which will cover 3 months of computer maintenance costs. In this case the cost should be spread across the 3 months in which the Department has the benefit rather than all the cost being taken in one month.

 Income in advance. A bill is raised by the University for services to be provided over the next 6 months. In this case the income should be spread over the six months rather than all being taken in the month that the sales invoice is raised. An example would be an MBA fee.

Accruals accounting achieves the necessary effect by including an entry into the I&E account with the other side of the entry shown as an asset or liability on the balance sheet.

Details of where to find a How To Guide for inputting accruals into Oracle are shown in Appendix 4. When the term “accrual” is used in this document it covers income accruals, cost accruals, prepayments and income in advance.

A reversing journal is a journal, which is posted in one period and then is reversed in the following period.

3) JUSTIFICATION FOR ACCRUALS ACCOUNTING.

 Actual v budget and actual v forecast reports will be more accurate on a Departmental, Divisional and University basis as many of the material timing issues which currently impact monthly management accounts will be removed. This will enable issues to be identified earlier and more effective corrective actions taken if required.

 Accruals accounting will allow better visibility of the expected year end result.

 HEFCE recommend that all Universities use accruals accounting during the year for monthly management accounts. The adoption of Accruals accounting improves the financial reporting credibility of the University.

 The Audit & Scrutiny Committee asked for Accruals Accounting to be introduced for the University of Oxford.

 Both the external and internal auditors in their management letters recommend the introduction of accrual accounting.

 More accurate reporting helps improve decision making by understanding earlier trends in the financial accounts.

4) CHANGE

5 University of Oxford - Finance Division Accruals policy 2009 The University of Oxford introduced accrual accounting for all Departments from February 2007.

A small Departmental Working Group was established to review the proposed policies and to help review the practicalities of the proposals and how they should be communicated. These recommendations were incorporated into the Accruals Accounting policy.

5) APPROACH

The approach for accrual journals, which will need to be input into Oracle Financials, by Departments and the GRN accruals, which will be posted centrally into Departmental Accounts are explained below:

A materiality level of £100k has been set for accruals accounting.

This means that Departments do not have to input any accrual, which is less than £100k. The majority of Departments will therefore have no, or only one or two transactions to post each month. Departments however will be able to post smaller transactions if they require.

The Divisional Financial Controllers have also been briefed and can help with any accruals which need posting. Working practices will need to be developed for each division and an approach for some Divisions could be that initially the Departments inform the Divisional Financial Controller if they think there is a need for an accrual and then the Divisional Financial Controller checks this and then helps the Department by posting the entry.

All accruals, which are posted, should be reversed in the subsequent period so each month the University starts with accruals of £0 brought forward. This avoids the control issue of postings being made to Departments and then being forgotten and causing issues at year end.

Many of the accruals which need posting are because a service has been provided by a supplier, a purchase order has been raised and the goods have been receipted. All that is awaited is the Purchase Invoice to be received and entered. For these types of transactions, a report can be run centrally by Financial Reporting to calculate the value of these GRN Accruals. These costs will be posted monthly to all Departmental accounts. This will ensure that these timing issues of the invoice not being received are dealt with centrally to minimise departmental work. The intention is that a list of these transactions should be available by working day 2 and will be emailed to Administrators and Finance Officers for departmental review. Departments can contact Financial Reporting with any adjustments, which are needed by working day 4 before the journal is posted by the Financial Reporting Team to each department. An equal but opposite journal will be posted to encumbrances to avoid the double inclusion in actual and encumbrance reports of the accrual and the encumbrance (See Appendix 3).

Only GRN accruals, which are greater than £50 will be posted.

Deferred Donations are currently posted centrally on a monthly basis using data collected by the Financial Reporting team. This process will continue and the deferral is not reversed until the end of the following month at the same time as the new deferral is being calculated.

6 University of Oxford - Finance Division Accruals policy 2009 The recommended approach is that Departments should review their accounts on working day 5 after this central posting and look for any additional accruals which need posting and then post them.

The monthly timing (except year end) would be:  WD1 AP Close  WD2 Receipt accrual posted to website for Departmental review  WD4 GRN accruals posted to Departmental Accounts  WD5-6 Manual accruals posted, if required, by department  WD6 Departmental Accounts finalised  WD7 General Ledger closed at end of day  WD8 Monthly Mid-Level report sent to Departmental Administrators

6) MATERIALITY

Only items in excess of £100k need to be posted as they are the items which will be material for the University. This materiality may be reduced in the future If a Department has 4 linked transactions, e.g. the purchase of goods has been split into 4 orders each for £30k and the good and services have not been received then the transactions should be linked and the materiality based on the sum of the transactions. In this case, the cost of £30k * 4 = £120k is above the materiality level and should be accrued.

7) TIMING

The GRN Accruals, which will have the main impact on most Departments, will be posted monthly.

Certain accounting transactions will only be posted quarterly e.g. trusts as logistically and resource wise, these postings can only be carried out on a quarterly basis. However within these months the posting of GRN accruals, the use of monthly accruals should substantially improve departmental cost accuracy.

8) SCOPE

The Accruals policy applies to the whole of the University of Oxford.

9) ACCOUNTING ITEMS EXCLUDED FROM ACCRUALS ACCOUNTING Certain transactions are excluded from accruals accounting, which are described below:

7 University of Oxford - Finance Division Accruals policy 2009  Research Accounts: The posting of accruals would cause reconciliation issues between the Grants Module and the General Ledger, which is best avoided. The only exception is that the monthly Goods Received Note (GRN) accruals will be posted to the General Ledger.

 John Fell income and expenditure, as income is matched monthly to expenditure by the Financial Reporting Team.

 Trust income and expenditure are matched quarterly by the Treasury team and it is intended to leave this process unchanged.

 Deposit Pool Interest will continue to be posted quarterly.

 All of these balance sheet postings should be for external transactions. There should be no accruals and prepayment between departments for sales and purchases as there is a risk that one department will include an income and the other department not include the costs (and vice versa), causing a misstatement of the total University accounts.

 There should be no postings for aligning with budget. For example if the budget includes a major repair cost in November of £200k but the work is not carried out until January. It would be incorrect to include a cost in November showing the actual v budget variance as £0 as this is a genuine timing difference between when services have been provided compared to when they were expected to be provided. This should then be explained as a variance.

The exclusions are quite comprehensive so that for most Departments the balance sheet adjustments will be for departmental expenditure and miscellaneous income considerably reducing the scope of the adjustments, which are needed.

10) FUTURE POSSIBLE DEVELOPMENTS

 Fixed assets could be capitalised quarterly  Allow Internal accruals between Departments  Heritage assets, which may not be budgeted, could be transferred to fixed assets at least quarterly in the future rather than just at the year end.  Use of Recurring journals for posting prepayments and income in advance on a regular basis to the accounts.

11) BALANCE SHEETS FOR DEPARTMENTS AND REPORTING

Accruals accounting is not intended to be the first stage of setting up balance sheets for Departments. It is intended to concentrate on producing one accrual balance sheet for the whole University. There

8 University of Oxford - Finance Division Accruals policy 2009 are specific requirements for more balance sheet information for Departmental Colleges and the Ashmolean Museum but different solutions will be developed.

Reports will be developed if required for Departments to be able to review their balance sheet items but the trial balance report per department will show the balance sheet accounts.

12) DISPUTES PROCESS

Financial Reporting reserve the right to correct any accrual made by a Department if it is not a correct accounting treatment.

If this is the case, the Department will be informed why the adjustment has been made.

13) SUPPORT AND COMMUNICATION

The Divisional Financial Controllers should be the first point of contact. The Financial Reporting team will come and give presentations if required, to provide support to Departments. This document and the related How to Guides will also be on the Finance website.

14) YEAR END PROCESS

It is intended that the year end process of collecting accruals data by forms and posting centrally will continue, as there is a much lower materiality level of £1k per transaction. This can be reviewed in the future depending on the outcome of future year ends.

APPENDIX 1- ACCRUALS ACCOUNTING – TECHNICAL BACKGROUND

This Appendix explains the technical accounting standards and requirements for accruals accounting.

In the accruals policy the matching concept is used to explain why accruals are needed. With the more recent guidelines, FRS18, which is issued by the Accounting Standards Board, this approach isn’t theoretically correct. The Appendix below however explains that the difference in approach has an immaterial impact so the matching concept can be used, as it is an easier way to explain the accruals concept.

FRS (Financial Reporting Standard) 18 states that an entity should prepare its financial statements on the accruals basis of accounting. Best practice through industry and in some other Universities is that management accounts are also prepared on this basis. This allows better comparability throughout the year of actual results against the budget and year end results.

FRS 18 explains that the accrual basis of accounting requires the non-cash effects of transactions and other events to be reflected, as much as possible, in the financial statements for the accounting period in which they occur and not in the period in which any cash is received or paid.

FRS18 explains that the reason for accruals accounting is that the accounts need to correctly define assets and liabilities, which are the “right or other access to future economic benefits” or “obligation to transfer economic benefits”. Examples of this principle would be:

 If stock is transferred to a third party, it is the point of time when the stock is transferred to the buyer, which creates a right to receive an economic benefit rather than the point at which the cash is received. In this example you would accrue for the revenue receivable and then reverse it when the sales invoice is raised on the system.  The prepayment of rent on a building, is an asset i.e. cash is transferred in return for rights to economic benefit through the use of the building to generate revenue either directly or indirectly for the period covered by the rental payment. Hence a prepayment can be recognised as an asset.

FRS 5 is the basis of defining assets and liabilities for accruals accounting. However this basis is not as easy to understand as the previous SSAP 2 approach, which defined accruals using the matching concept. “Matching,” meant:

“Revenue and profits dealt with in the profit and loss account are matched with associated costs and expenses by including in the same account the costs incurred in earning them (so far as these are material and identifiable).

The accounting guidance note in FRS 18 states that it is unlikely that there are any material differences in accounting treatment compared to the FRS 5 approach of defining accruals using the definitions of assets and liabilities and the SSAP 2 approach. As it is a much easier concept to explain, the matching concept is used here for all explanations of the Accruals Policy.

APPENDIX 2 HOW TO POST AN ACCRUAL

1) What type of accounting transaction is it, as the accounting treatment will vary with the type of transaction?

Income Accrual

This is used to post a transaction where the service has been provided to a third party but the sales invoice has not been raised.

The accounting entry should be:

CR Dept Cost Centre e.g. KH0000-48210-25-00000-10

DR Other Income in advance KH0000-19151-00-00000-10

Replace the cost centre with the required cost centre as KH0000 is illustrative. The journal should be posted as a reversing journal, reversing into the following month. The natural income account will vary depending on the service provided.

Cost Accruals

This is used to post a transaction where the service/goods have been provided to the University by a third party but the bill has not been received. This would cover the following types of transactions, which have not already been posted centrally by matching the PO to the Good Receipt note. Examples would be:

 Purchase order raised but receipting not yet done so not picked up by centrally posted accruals  A service has been provided but no transaction has yet been set up in Oracle e.g. the Purchase Order is being raised retrospectively.  Items outside the Purchase ordering cycle e.g. Examination invigilator costs

DR Dept Cost Centre e.g. KH0000-71120-00-00000-10

CR Accruals KH0000-22100-00-00000-10

Replace the cost centre with the required cost centre as KH0000 is illustrative.

The journal should be posted as a reversing journal, reversing into the following month. The natural cost account will vary depending on the service received.

Prepayments

This is used to post a transaction when a cost has been paid in advance and covers a number of months. For example an invoice is received in September for £3000 and it covers 3 months between September and November . In September an adjustment for this prepayment is entered for £2000 so that the I&E impact in the month would be £1000. This journal would then be reversed in October .

11 University of Oxford - Finance Division Accruals policy 2009 In October, you would need to do an adjustment to the prepayment of £1000 so that the I&E impact in the month is £1000 and the YTD impact is £2000. No prepayment adjustment would be needed in November as the invoice cost of £3000 less the accrual reversal from October of £2000 would give the correct I&E impact of £1000.

CR Dept Cost Centre e.g. KH0000-71120-00-00000-10

DR Prepayments KH0000-14000-00-00000-10

Replace the cost centre with the required cost centre as KH0000 is illustrative.

The journal should be posted as a reversing journal , reversing into the following month. The natural cost account will vary depending on the service received.

Income in Advance

This is used to post a transaction where a sales invoice has been raised in advance and it covers a number of months. For example, an invoice is raised in March for £6000 and it covers 3 months between March and May. In March an adjustment for this income advance is entered for £4000 so that the I&E impact in the month would be £2000. This journal would then be reversed in April. In April you would need to enter an adjustment to the income in advance of £2000 so that the I&E impact in the month is £2000. No income in advance adjustment would be needed in May as the sales invoice of £6000 less the amounts charged in March and April of £2000 each month = £4000 would give the correct I&E impact of £2000.

DR Dept Cost Centre e.g. KH0000- 48210-25-00000-10

CR Income in Advance KH0000- 26900-00-00000-10

Replace the cost centre with the required cost centre as KH0000 is illustrative. The journal should be posted as a reversing journal, reversing into the following month. The natural income account will vary depending on the service provided.

1) The journals can be posted directly into Oracle or using ADI.

2) Journals should all start with a batch header that has the 2-digit code (e.g. KH) of the department initials and date so that for reconciliation, review purposes, the department, which has posted the amount to the balance sheet, can be identified. The journal should also have a clear description of what the accounting entry represents.

3)Backup for all accruals should be kept and information will need to be supplied monthly to Divisional Accountant who will forward to Financial Reporting as part of our monthly balance sheet review process. This is a key control for Reporting accuracy and understanding.

4) Accounting Impact Examples Cost accrual

A service has been received in January but the invoice is not received until March. No Purchase Order has been raised so the GRN accruals process cannot work so an accrual posting is needed in the General Ledger.

Cash Accounting

Jan Feb March

Invoice posted into AP £0 £0 £3,000

Accrual Accounting Jan Feb March

Invoice posted into AP £0 £0 £3000

General Ledger Accrual £3,000 £3000 £0

Reversal of receipt accrual (£3,000) (£3,000) in subsequent month as all journals are reversing ------I&E Impact £3,000 £0 £0

The accrual can be regarded as an entry to post the correct amount into the period in which the service is received. Once the invoice is received then the accrual is no longer needed and no new accrual entry is posted in the General Ledger in that month though the previous month’s entry will reverse.

Exactly the same impact occurs with income accruals apart from the sign conventions are reversed.

APPENDIX 3 GOODS RECEIVED NOTE (GRN) ACCRUALS

Longer term the intention is to use Oracle Financials functionality for this process. This would involve Oracle Financials generating the accruals based on the Uninvoiced Receipts Report which records details of Purchase Orders where goods have been receipted but the Purchase invoice has not yet been received. There are however historical data issues in Oracle Financials where there are purchase orders, which have not been receipted to purchase invoices either in full or in part and are not “genuine” transactions.

In the meantime the approach Financial Reporting will take is to download the purchase order amounts, which have been matched to receipts and then remove amounts over 6 months old, as the historical data issues tend to be older than 6 months old. Financial Reporting will remove these old items and then the expected journal will be emailed to departments. This can be reviewed by Departments to see what entries are intended to be posted.

At the year end, a number of items had to be adjusted where services or goods had been receipted but the service or goods had not been received. This would have generated incorrect accruals. This particularly related to blanket purchase orders where some departments receipted the blanket purchase order for the whole year at the beginning of the year. These can be adjusted short term by the Department informing Financial Reporting of the adjustment but longer term the receipting accuracy needs to improve.

The Receipts Accruals will be reversed in the following month, as this exercise will take place monthly for all Departments, i.e. at each month end the position is reassessed and the month end receipts accruals posted.

End to End Process

 Ensure all GRN’s have been receipted in Purchasing  Process all Payables invoices  Close AP  Run the Uninvoiced Receipts Report in Purchasing which covers all receipted purchase orders  Download the Uninvoiced Receipts Report to Access  Remove items over 6 months as this is where errors tend to be  Post report sorted by cost centre onto the web  Departments review emailed report and inform Financial Reporting of any items to be corrected.  Journal posted via ADI to Departments.

Accounting Impact Examples for GRN accruals

A service has been received in January but invoice for £3k not received in March. The invoice has been correctly matched to Purchase Order so the amount will be picked up as a receipt accruals

Current Accounting

Jan Feb March

Invoice posted into AP £0 £0 £3,000

Receipt Accrual Accounting Jan Feb March

Invoice posted into AP £0 £0 £3000

Receipt Accrual £3,000 £3000 £0

Reversal of receipt accrual (£3,000) (£3,000) in subsequent month as all journals are reversing ------I&E Impact £3,000 £0 £0

The accrual can be regarded as an entry to post the correct amount into the period in which the service is received. Once the invoice is received then the accrual is no longer needed and is removed from the receipt report so no accrual is posted in that month. No Departmental input is needed apart from review.

The receipt accrual when posted into the Departmental account will show a description such as “GRN accrual Mth 7”. For each item there will be details of the Purchase Order number, the supplier name and for receipts the award number. In the following month, there will be a journal called “Reverses GRN accrual Mth 7 and then the new GRN accrual called GRN accrual Mth 8 with the new information for that month end for purchase order number and supplier name.

The GRN accrual will be posted for both Research and non-Research expenditure. For Research expenditure, a matching income release will also be posted as per the year end. This will also be on a reversing journal.

Encumbrances

Each month Financial Reporting will post a journal, which is equal, and opposite to the GRN accrual to reduce the encumbrances, as the encumbrances would have been replaced by accruals i.e. the purchase order commitment is regarded as an actual costs. This journal will be a reversing journal.

APPENDIX 4 HOW TO POST AN ACCRUAL IN ORACLE

Instructions on how to post and reverse an accrual journal in Oracle can be found in the ‘How To’ document called ‘Enter, Post and Reverse an Accruals Journal’ on the Finance Division website